Perfect expectation damages (PED) are meant to leave the promisee indifferent

nonperformance of the contract. The baseline is value to promisee if contract

then are equal to the difference between the net value of performance of the

In this case, Damages should compensate for any loss that CP makes due to non

So,Expectation Damages = 15-6-5 = $4 per t-shirt

 the promisee indifferent between performance and
e to promisee if contract was performed. Damages
e of performance of the contract and no contract .

hat CP makes due to non-performance by PT

 efficient breachisavoluntarybreachofcontractandpaymentofdamagesbyaparty
concludesthattheywouldincurgreatereconomiclossbyperformingunderthecontra

At the level of damages set at $4 per unit, PT will only breach the contract and d
to not perform when it is indifferent between delivering to CP when it faces sa
economic consequence by either performing or not performing

For ex., let's assume PT earns $1 ($5-$4) profit per unit by supplying to CP. I
decides not to supply it to CP and rather give to someone else at higher price, s
it faces same economic consequence (pay $4 to CP and earn $5 ($9-$4) fro
someone else => total profit = 5-4 =$1). It will not breach contract if other part
less than $9 and will definitely breach contract if it pays more than $9. In the la
This will lead to efficient breach as breach will happen only when total profit in
system increases.
mentofdamagesbyapartywho
performingunderthecontract

breach the contract and decide

ng to CP when it faces same
g or not performing

unit by supplying to CP. If it

ne else at higher price, say $9,
P and earn $5 ($9-$4) from
ach contract if other party pays
ys more than $9. In the latter.
n only when total profit in the
 PT
Units 100
Price $5
Cost

Probability of performin 0.6

Probability of non-perf 0.4
within 3 days within 4 days
--> CP --> KM
100
$15 $20 $7
$6 $5
$10

Marginal
Marginal Cost Marginal Benefit
Expected Benefit
$ 11 $ 9 $ 5.40
$ 16 $ (5) $ (2.00)

Net Expected Profit $ 3.40

Since this Net expected profit is less than $4, wh
otherwise have earned if the contract conditions
this reliace on current contract with PT is no
 In normal circumstances
Cost 5
Production 6
Selling Price 15
Profit 4
cted profit is less than $4, which CP would
ed if the contract conditions were different,
current contract with PT is not efficient