ECMC37 - Chapter 1.docx

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University of Toronto Scarborough
Economics for Management Studies
Michael Krashinsky

ECMC37 | Law and Economics Chapter 1: An Introduction to Law and Economics  Until recently, law confined the use of economics to antitrust law, regulated industries, tax, and some special topics like determining monetary damages  Beginning in the early 1960s, this limited interaction changed dramatically when the economic analysis of law expanded into the more traditional areas of the law, such as property, contracts, torts, criminal law and procedure, and constitutional law o “Will private ownership of the electromagnetic spectrum encourage its efficient use?” – laws keep economic efficiency in mind now o Ronald Coase and Gary Becker received Nobel Prizes in 1991 and 1992 in founding the economic analysis of law  Judges and other officials use economics for evaluating laws’ effects on efficiency, and distribution of income o Economic efficiency is a comprehensive measure of public benefits including profits of firms, the well-being of consumers, and the wages of workers  Economics provided a scientific theory to predict the effects of legal sanctions on behavior o Sanctions look like prices, and people respond to these sanctions much as they respond to prices o high costs linked to lower consumption; harsh sanctions linked to doing less of sanctioned activity  Ex: If a manufacturer knows his product will sometimes injure consumers, how safe will he make the product? o Depends on cost of making the product safer, the manufacturers legal liabilities, and the extent to which injuries discourage consumers from purchasing the product – safety will be adjusted until cost of additional safety equals benefit from reduced liability and higher consumer demand  Efficiency requires the least-cost risk-bearer to take precautions against cir
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