Part A-I
An Introduction to
Law and Economics
8/1/07 Intro_A 1
What is the economic analysis of law?
Positive predictions
Normative standards for evaluating
laws
Framework for economic analysis of
the law
Some examples
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Positive predictions
Lawmakers and judges often ask two
fundamental questions:
“How will a given sanction (law) affect
behaviour of individuals?”
“How will a given sanction (law) affect
society as a whole?”
Economic theory should be able to provide relatively
rigorous answers to this type of question
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Economic theory should be able to predict what a
utility or profit maximizing economic agent will
do.
Economic theory contains concepts of efficiency
which can help establish criteria for ensuring
maximum societal well-being.
This last statement will be qualified
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Normative standards for
evaluating laws
Laws are instruments for achieving specific social
goals, which in turn are premised on social
values.
There really is no positive theory of optimal social
goals.
Nonetheless, economic theory can assess the
extent to which a given law will achieve the
stated social goals
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What society judges to be „good‟ or „bad‟
- socially desirable outcomes
- distribution of wellbeing across individual
members of society
There is no positive theory of optimal income
distribution (distribution of wellbeing)
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Economic theory can help make the pie as big as
possible (efficiency – a positive concept)
Economic theory cannot help decide on who
should get what size slice of the pie (distribution
– a normative concept)
However positive economic theory can help
assess how well society is achieving its stated
normative goals
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Framework for economic
analysis of the law
Institution --> Behaviour --> Outcome
Economic agents make decisions within a given
institutional setting (some specific set of laws)
The optimizing behaviour of economic agents is
restricted by the given institutional setting and
this affects their optimal choice
We are interested in the outcome for society as a
whole - resulting from the optimizing behaviour
of individual agents under a given institutional
setting (set of laws)
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The Paradigm:
Institution --> Behaviour --> Outcome
Institution - the law, regulations, sanctions
Behaviour - of utility/profit maximizing individuals
subject to the institutional constraints
Outcome - impact of individual behaviour on
societal well-being
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Some examples
The following are some examples more fully
detailed in the lecture notes (on line)
Review the examples briefly. We will deal with
them in detail when we cover specific topics
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Sanctions affect behaviour - WSIB
FOR 41-230 only
Society might benefit from someone breaking a
contract – the steel mill
Who should be responsible for the weather? – the
power company
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For each example consider the following questions
What is society trying to achieve?
Whose behaviour is being manipulated?
How does the law affect the behaviour of the
individuals or firms?
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Justice ?
The „law‟ and the concept of „justice‟ (fairness, equitableness,
righteousness) are often treated as synonymous
Can economics help in assessing the extent to which a given
law is JUST? Not really
JUSTICE is a normative notion rooted deeply in the value
system of individuals, or society
Although it is a (the?) fundamental principle underlying our
legal system, JUSTICE is a concept beyond economics
Fortunately, what is often accepted as JUST in Western
(most?) societies, is often what is economically efficient
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