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Law and Economics Essay

Law and economics,” also known as the economic analysis of law, differs from other forms of legal analysis in two main ways. First, the theoretical analysis focuses on efficiency. In simple terms, a legal situation is said to be efficient if a right is given to the party who would be willing to pay the most for it. There are two distinct theories of legal efficiency, and law and economics scholars support arguments based on both.

The positive theory of legal efficiency states that the common law Judge-made law, the main body of law in England and its former colonies, including he United States) is efficient, while the normative theory is that the law should be efficient. It is important that the two theories remain separate. Most economists accept both. Law and economics stresses that markets are more efficient than courts. When possible, the legal system, according to the positive theory, will force a transaction into the market.

When this is impossible, the legal system attempts to “mimic a market” and guess at what the parties would have desired if markets had been feasible. The second characteristic of law and economics is its emphasis on incentives and people’s responses to these incentives.

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For example, the purpose of damage payments in accident (tort) law is not to compensate injured parties, but rather to provide an incentive for potential injurers to take efficient (cost-justified) precautions to avoid causing the accident.

Law and economics shares with other branches of economics the assumption that individuals are rational and respond to Law and Economics By Turtledove action. Law and economics is more likely than other branches of legal analysis to use empirical or statistical methods to measure these responses to incentives. History and Significance Modern law and economics dates from about 1960, wonderland Cease (who later received a Nobel Prize) published “The Problem of Social Cost. Gordon Outlook and Frederica Hayes also wrote in the area, but the expansion of the field began with Gary Backer’s 1968 paper on crime (Becker also received a Nobel Prize). In 1972, Richard Poster, a law and economics scholar and the major advocate of the positive theory of efficiency, published the first edition of Economic Analysis of Law and founded the Journal of Legal Studies, both important events in the creation of the lied as a thriving scholarly discipline. Poster went on to become a federal Judge while remaining a prolific scholar.

An important factor leading to the spread of law and economics in the sass was a series of seminars and law courses for economists and economics courses for lawyers, organized by Henry Mane and funded, in part, by the Liberty Fund. The discipline is now well established, with eight associations, including the American, Canadian, and European law and economics associations, and several Journals. L Law and economics articles also appear regularly in the major economics Journals, and the approach is common in law review articles.

Most law schools have faculty trained in economics, and most offer law and economics courses. Many economics departments also teach courses in the field. A course in law and economics is very useful for undergraduates contemplating law school. Several consulting firms specialize in providing economic expertise in litigation. Substance Contract Law The law governing exchange is crucial for a market economy. Most of the doctrines of contract law seem consistent with economic efficiency.

Law and economics study of contract law has shown that, in general, it is efficient for parties to be allowed to write their own contracts, and under normal circumstances, for courts to enforce the agreed-on terms, including the agreed-on price. The courts will generally not enforce contracts if performance would be inefficient, but, rather, will allow payment of damages. If, for example, I agree to build something for you in return for $50,000, but meanwhile costs increase so that the thing would cost me $1 50,000 to build, it is with a monetary payment instead.

This is efficient. Contracts and contract law are also designed to minimize problems of opportunism. The danger of opportunism arises when two parties agree to something, and one makes irreversible investments to carry out his side of the bargain. So, for example, a company invests in a railroad spur to a coal mine, making a contract in advance to ship the coal at a specific price. Once the railroad is built, the mine owner can refuse to honor his contract and can hold out for a lower shipping rate.

As long as this rate exceeds the railroad’s incremental costs, the railroad owner will be tempted to accept. If he does so, he will not receive the full return on the spur line that he needed to make the investment worthwhile. However, not all doctrines are efficient. Contracting parties will sometimes specify damages (called “liquidated damages”) to be paid if there is a breach. If the courts decide that these liquidated damages are too high?that they are a penalty rather than true damages?they will not enforce the amount of contractual liquidated damages.

This failure to enforce agreed-on terms is a major guzzle to law and economics scholars; it appears that the courts would do better to enforce the parties’ agreement, Just as they do with respect to price and other terms of a contract. Tort Law Tort law and criminal law protect property rights from intentional or unintentional harm. The primary purpose of these laws is to induce potential toreadors (those who cause torts, or accidents) or criminals to internalize?that is, take account of? the external costs of their actions, although criminal law has other functions as well.

Tort law is part of the system of private law and is enforced through private actions. The economic analysis of tort law has stressed issues such as the distinction between negligence (a party must pay for harms only when the party failed to take adequate or efficient precautions) and strict liability Because most accidents are caused by a joint action of injurer and victim,efficient rules create incentives for both parties to take care; most negligence rules create exactly these incentives.

Strict liability is important when the issue is not only the care used in undertaking the activity, but also whether the activity is done at all and the extent to which it is done ; highly dangerous activities are generally governed by strict liability. Tort law used to be uninteresting and unimportant, dealing largely with automobile accidents. But it has become quite important in the United States in the last fifty years, because many events traditionally treated under contract law are now subject to tort law.

For example, in products liability and medical malpractice cases, the parties have a appreciated relationship and so could have specified and traditionally did specify in heir contracts what damages would be paid in the event of a mishap. But since about 1950, the courts have refused to honor these contracts, treating these instead as tort cases. Many observers believe that this was a fundamental error of the courts and look on it as the primary example of an inefficient doctrine in modern American law.

Scholars have found that this error was caused by actions on the part of the plaintiffs bar, who were seeking to benefit themselves at the expense of the public in general. Problems are exacerbated when claims are aggregated through the mechanism of class actions. Criminal law is enforced by the state rather than by victims. This is because efficient enforcement requires that only a fraction of criminals be caught (in order to conserve on enforcement resources) and the punishment of this fraction be multiplied to reflect the low probability of detection and conviction.

If, for example, only one out of four criminals is caught and punished, then the punishment must be four times the cost of the crime in order to provide adequate deterrence. However, most criminals do not have sufficient wealth to pay such multiplied fines, and so incarceration or there forms of no pecuniary punishment must be used. One implication of law and economics is that a fine should be used as punishment whenever the miscreant can pay.

The reason is that fines are transfers and do not create deadweight losses; imprisonment, on the other hand, transfers virtually no wealth from the criminal but causes two forms of deadweight loss: the loss of the criminal’s earning power in a legitimate Job in the outside world and the cost to taxpayers of providing a prison and guards. But because so few criminals have enough wealth to pay multiplied nines, private enforcement would not be profitable for private enforcers, and so the state provides enforcement.

In some circumstances, incarceration serves the additional function of incapacitation of potential wrongdoers. Criminal law has been the subject of the most extensive empirical work in law and economics, probably because of the availability of data (see crime). Economic theory predicts that criminals, like others, respond to incentives, and there is unambiguous evidence that increases in the probability and severity of punishment in a Jurisdiction lead to educed levels of crime in that Jurisdiction.

The issue of the deterrent effect of capital punishment has been more controversial, but several recent papers using advanced econometric techniques and comprehensive data have found a significant deterrent effect; each execution deters between eight and twenty-eight murders, with eighteen being the best single estimate. No refereed empirical criticism of these papers has been published. Research on procedural rules has shown that increased rights for accused persons can lead to increases in crime.

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