Computer Laboratory

Course pages 2012–13

Economics and Law

Principal lecturer: Prof Ross Anderson
Taken by: Part IB
Past exam questions
Information for supervisors (contact lecturer for access permission)

No. of lectures: 8
Suggested hours of supervisions: 2
This course is a prerequisite for the Part II courses Security II, Business Studies and E-Commerce.


This course aims to give students an introduction to some basic concepts in economics and law.


  • Game theory. The choice between cooperation and conflict. Prisoners’ Dilemma; Nash equilibrium; hawk-dove; iterated games; evolution of strategies; application to biology and computer science.

  • Classical economics. Brief history of economics. Definitions: preference, utility, choice and budget. Pareto efficiency; the discriminating monopolist. Welfare and the Arrow theorem.

  • Classical economics continued. Supply and demand; elasticity; utility; the marginalist revolution; competitive equilibrium. Trade; monopoly rents; public goods; oligopoly. The business cycle.

  • Market failure. Asymmetric information: the market for lemons; adverse selection; moral hazard; signalling; and brands. Transaction costs and the theory of the firm. Behavioural economics: bounded rationality, heuristics and biases.

  • Auctions. English auctions; Dutch auctions; all-pay auctions; Vickrey auctions. The winner’s curse. The revenue equivalence theorem. Mechanism design and the combinatorial auction. Problems with real auctions. Applicability of auction mechanisms in computer science.

  • Principles of law. Contract and tort; copyright and patent; binding actions; liabilities and remedies; competition law; choice of law and jurisdiction.

  • Law and the Internet. EU directives including distance selling, electronic commerce, data protection, electronic signatures and copyright; their UK implementation. UK laws that specifically affect the Internet, including RIP.

  • Network economics. Real and virtual networks, supply-side versus demand-side scale economies, Metcalfe’s law, the dominant firm model, price discrimination. Regulatory and other public policy issues of information goods and services markets.


At the end of the course students should have a basic appreciation of economic and legal terminology and arguments. They should understand some of the applications of economic models to systems engineering and their interest to theoretical computer science. They should also understand the main constraints that markets and legislation place on firms dealing in information goods and services.

Recommended reading

* Shapiro, C. & Varian, H. (1998). Information rules. Harvard Business School Press.
Varian, H. (1999). Intermediate microeconomics - a modern approach. Norton.

Further reading:

Smith, A. (1776). An inquiry into the nature and causes of the wealth of nations, available at
Poundstone, W. (1992). Prisoner’s dilemma. Anchor Books.
Levitt, S.D. & Dubner, S.J. (2005). Freakonomics. Morrow.
Seabright, P. (2005). The company of strangers. Princeton.
Anderson, R. (2008). Security engineering (Chapter 7). Wiley.
Galbraith, J.K. (1991). A history of economics. Penguin.
Lessig L. (2005). Code and other laws of cyberspace v2, available at