Download Economics in the Law

Economics in the Law
Introduction
Introduction
• What is the study of economics
and the law?
• Why study economics and the
law?
• What is the purpose of the law?
• What is socially efficient
production?
• What is a Pareto Optimum?
Law and Economics
Economic analysis of the law
– The use of economics to study the effects of
actual legal rules. (explanatory)
– The use of economics to determine optimal,
or most efficient, legal rules.
(proactive)
– Law and economics holds that law can
guide people’s behavior into socially
desirable channels.
(normative)
– We assume that individuals seek to inform
themselves about what the law requires of
them and then conform their behavior to the
dictates of the law.
– Some lawyers and economists believe that
efficiency guides the evolution of the law
Law and Economics
Why study economics and the law?
• An opportunity to apply economic
analysis to the real world and real
world problems
• Economics often plays an
important role in litigation
• Economists and lawyers tend to
think alike
• Many undergraduates in
economics go on to law school
Law and Economics
What is the purpose of the law?
• To promote justice
• To promote efficiency
• Does it do either?
We will concentrate on whether
the law can be efficiency
enhancing.
• That means avoiding value
judgments whenever possible.
• Avoid questions of:
–
–
–
–
Fairness
Justice
Social justice
Inequality
What is a socially efficient
solution?
• Maximizes joint profits (welfare), total
output, or the size of the pie.
• Does not necessarily maximize
profits for any individual player
• Jeremy Bentham proposed the
“happiness principle”
– The greatest good for the greatest
number
– Maximize social utility
Pareto Optimum
• Because interpersonal comparisons of
utility are not possible, we may settle for a
Pareto optimum.
• Starts with given wealth distribution
– Fairness of initial distribution is irrelevant
• If a value enhancing exchange is possible,
we are not at a Pareto optimum
• Each distribution of wealth has a
corresponding Pareto optimum
• Does a Pareto Optimum maximize welfare?
(only given the initial distribution and no
interpersonal comparisons of utility )
The Jelly Bean Economy
• Distribute a package containing 5
jelly beans to each child in class
• Each package contains randomly
selected flavors of jelly beans.
• A few packages may have all
licorice flavored beans or lemon
flavored beans
• Now allow the children to engage
in trade
Will this result in a Pareto Optimum?
• Will each child end up with 5 jelly
beans?
• Will each child be equally happy
with the final outcome?
• Will some children feel they have
made bad trades?
• Will some children feel that the
initial distribution was unfair?
• Will any child be worse off after
trading?
Four Topical Areas
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•
•
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Property
Contracts
Torts
Criminal(not to be covered)
Property
• What is property?
• What is an efficient allocation
of property rights?
• Does the assignment of
property rights have an impact
on efficiency?
• How do penalties for violating
property rights affect
efficiency?
• What is the Coase Theorem?
Contracts
• What are the essential properties of a
contract?
– Contracts involve mutual promises
– Contracts promise future performance
• Does contract law determine efficiency?
• A broken promise breaches a contract.
When is it efficient to breach?
– What are the remedies for efficient breaches?
• Morality versus efficiency in the
enforcement of contracts.
Torts (unintentional)
• Tort law defines reciprocal
obligations with regard to
performance when contracts are
not possible.
• What is an unintentional tort?
• Damages internalize externalities.
• Efficient damage rules
• Compensatory and punitive
damages
Criminal Law
• When torts are not enough
• Optimal deterrence
• Optimal sentencing
This is Not a Course in the Law
• We are concerned with
generalized legal rules that may
differ by time period or jurisdiction.
• We are concerned with
hypothetical legal rules.
• If you need to know the law,
consult a lawyer.
Common law versus civil law
• Common law
– Based on precedent, but may
change over time
– Attempts to incorporate changing
mores and social values
• Civil law
– Based on codes established by
government
– Trumps common law