ECO320H1 Chapter Notes - Chapter 1: Economic Efficiency, Economica
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ECO 320
Textbook Notes
Chapter 1: An Introduction to Law and Economics
•In the early 1960s, the economic analysis of law expanded into the more
traditional areas of the law (i.e. property, contracts, torts, criminal law).
•Economics has played a vital role in law shaping everything from the deregulation
of certain regulatory bodies to even deciding court cases.
•Economics provides a scientific theory to predict the effects of legal sanctions on
behaviour.
oParallel between consumers’ reactions to higher prices and the reaction of
companies to more severe sanctions (sanction seen as a “price”).
oTheories (price/game) and methods (stats/econometrics) are used to
analyze the effects of the implicit prices that laws attach to behaviour.
•Economics generally provides a behavioural theory to predict how people respond
to laws.
•Economics helps evaluate efficiency in law.
oI.e. the cost of raising the fine for speeding exceeds the benefit of fewer
accidents and therefore the increase would be inefficient.
•Economics can predict the effect of laws on the distribution of income.
oI.e. who really will bear the burden of alternative taxes?
•Economic efficiency is a comprehensive measure of public benefits that include
the profits of firms, the well-being of consumers, and the wages of workers.
oAll 3 should be aligned so that it is a win-win-win situation.
•Expected cost to criminal (‘price’) = probability of getting caught X severity of
punishment if caught
•If it were cheaper to not prosecute and imprison a criminal, hefty fines would be
imposed thereby deterring the criminal from committing the crime and
minimizing the cost to society for administering the law.
•Central question – “How will the rule articulated by the lawmaker to resolve a
particular dispute affect the behaviour of similarly situated parties in the future?”
•Least-cost risk-bearer: the principle that states the courts will allocate risks
uncovered in a contract to the party who can bear them at least cost.
oIt is efficient for the party with the lowest cost to bear the risk.
oIf the two parties were to cooperate, their joint profits would be
maximized if the least cost party bore the risk.
•The redistributive approach to the formation of laws involves the courts
interpreting/making laws to redistribute income to deserving groups of people.
•The tax-and-transfer system (i.e. welfare) system can accomplish redistributive
goals more efficiently than private legal rights.
oIt focuses precisely on the inequality in income to tax more on the rich and
less on the poor.
oPrivate legal rights would favour, for example, consumers over companies
when in each group there may be a large variance in income between
individuals.