We introduce diagnostic expectations into a standard setting of price formation in which investors learn about the fundamental value of an asset and trade it. We study the interaction of diagnostic expectations with learning from prices and speculation (buying for resale). With diagnostic (but not with rational) expectations, these mechanisms lead to price paths exhibiting three phases: initial underreaction, then overshooting (the bubble), and finally a crash. With learning from prices, the model generates price extrapolation as a by-product of beliefs about fundamentals, lasting only as the bubble builds up. When investors speculate, even mild diagnostic distortions generate substantial bubbles.

A central challenge in securing property rights is the subversion of justice. We present a model of a polluter whose discharges harm multiple owners, and we compare property rules, liability rules, and regulation on efficiency grounds. We provide conditions under which property rules are preferred to liability rules, thus verifying the Calabresi-Melamed conjecture. Regulation that enforces partial abatement may be preferred to either of the extreme rules. An empirical analysis of water quality in the United States before and after the Clean Water Act shows that the effects of regulation are consistent with several predictions of the model.