Part B-I The Economic Theory of Legal Process Optimal Allocation of Legal Process Resources 27/11/08 Process_B

Objectives - understand why we should not expect the legal process (application of the law) to be perfect - understand what factors determine the efficient amount of resources allocated to the justice system - understand what factors might lead to improved legal process 27/11/08 Process_B

A model of the cost of legal process The legal process is a set of procedural rules - tools or instruments - used in the application of ‘substantive law’ (such as property, contract, tort or criminal law). There are two sets of costs associated with these tools or instruments: Administrative costs - denoted ca Cost of errors - denoted c(e) 27/11/08 Process_B

Administrative costs - ca Administrative costs include: Plaintiff’s costs (direct and indirect) Defendant’s costs (direct and indirect) Public costs (government funded - operation of the justice system court system – not police or jails) These costs increase as a suit moves through the various stages of the legal process Generally these costs are relatively easy to quantify (some indirect costs might be more difficult – eg. ‘emotional costs’ of a lawsuit) 27/11/08 Process_B

Cost of errors – c(e) Cost of errors: Erroneous judgments or outcomes - the wrong party is found at fault, or an incorrect finding is made in a criminal matter - correct party is found at fault but the wrong amount of damages (or punishment) is assessed 27/11/08 Process_B

Why do errors occur? If the court had perfect information (complete and correct information) then it could make perfect decisions (a correct application of the law to a given case) A ‘perfect decision’ is the decision that the court would make if it had ‘perfect information’ Termed the ‘perfect information judgement’ and denoted j* The actual judgement in a given case is denoted j The ‘extent of the error’ in judgement is e = j* - j . 27/11/08 Process_B

The ‘extent of the error’ in judgement is e = j* - j Courts seldom have ‘perfect information’, so that mistakes in applying substantive law are not uncommon. e does not measure the social cost of the error only how far off target the judgement was. The social costs of the errors (denoted E) is something quite different. Small judgement errors can have great social costs and large judgement errors can have minimal social costs. NOTE: The implicit assumption is that the ‘trier of fact’ (judge and/or jury) is rational (which also implies capable of understanding all of the information) and impartial. They only make mistakes because they do not know all the facts. They do not make mistakes because of stupidity or bias or bribes. 27/11/08 Process_B

Why don’t courts simply take the time and effort to get all the information and get it right? Acquiring information is costly (these information costs represent a large part of the administrative costs). Information is generally not a free good. Judgement errors cause a loss of societal resources (inefficient behaviour on the part of potential injurers and potential victims) but acquiring information also requires societal resources. As usual there is a trade off. As the courts attempt to acquire more and better information the cost of errors declines but administrative costs go up. 27/11/08 Process_B

Why be concerned with errors in the application of the law Why be concerned with errors in the application of the law? – the cost of errors Cost of errors – forget JUSTICE We know that it is important to get the right result in criminal trials – ‘optimal’ deterrence leads to ‘optimal’ crime. But what about civil suits? Civil suits generally involve private parties in disputes over money - so what if an error is made – tough luck! 27/11/08 Process_B

Does society have an interest in the correct outcome of civil suits Does society have an interest in the correct outcome of civil suits? Is the cost of errors in civil suits a social costs, or a purely private cost – one side wins/one side loses? Tort law that ‘appropriate’ legal rules provide the correct ‘incentives’ to individuals, inducing them to act in an efficient manner with respect to risk taking Contract law provides the incentives to honour promises when it is efficient to do so, leading to efficient economic outcomes Property law provides the efficient incentives with respect to property rights 27/11/08 Process_B

An error made in the application of the law represents a social cost. Yes, society does have an interest in ‘correct outcomes’ both in criminal and in civil matters. To the extent that ‘efficient’ legal rules that are applied incorrectly (wrong rulings), the wrong incentives will be given to economic agents and inefficient behaviour (wasteful behaviour) will result. An error made in the application of the law represents a social cost. 27/11/08 Process_B

The Social Cost of Legal Process Social legal process costs (SCLP) = ca + c(e) Consider ca = waa wa = is the cost per unit of additional legal resources a = number of units of legal resources used and c(e) = p(a)E p(a) = the probability of a judgement error E = the cost to society of an error, if one occurs SCLP = waa + p(a)E Does this look familiar? 27/11/08 Process_B

Some Pictures Expected cost of an error Slope of the curve For a given error cost (E) the probability of an error decreases as legal resources are increased p(a) decreases at a decreasing rate $ Shifts in curve - size of E (capital offence vs parking ticket) p(a)E a Additional legal resources 27/11/08 Process_B

Costs of administration Slope of the curve - wa is fixed (assumption) $ waa Shifts in curve changes in wa legal rules productivity of justice system a Additional legal resources 27/11/08 Process_B

SCLP – total cost of legal process Intersection has no particular significance. We want to minimize the sum of waa and p(a)E – the total social cost of legal process $ waa p(a)E a Additional legal resources 27/11/08 Process_B

Optimal Legal Process – minimum SCLP SCLP = waa + p(a)E SCLP curve is vertical sum of waa and p(a)E $ waa Optimal level of a p(a)E a* a 27/11/08 Process_B

The SCLP curve is U-shaped, implying some minimum (efficient) level of social costs exist (a*) Intuition: The marginal social cost of the last unit of legal resources devoted to the administration of the legal system should equal the marginal social benefit gained from that last unit of resources If MSCa < MSBa then a is too great – society should cut back on legal administration and use the resources in some other activity If MSCa > MSBa then a is too small – society should increase legal administration, taking resources from some other activity WARNING: estimating the cost of administration is fairly straight forward but estimating the expected cost of errors is generally very difficult. 27/11/08 Process_B

Due Process Think of the notion of ‘due process’ in these terms. How might we define ‘due process’? Would ‘due process’ be something different in a capital punishment case as opposed to a traffic ticket? Every Canadian citizen is protected by Civil law (property, tort, contracts, etc.). Does every Canadian citizen who believes that they have suffered harm have the right to their ‘day in court’ on any matter? Why wouldn’t they? Are any rights absolute? Think of various rules of evidence. (Probative value or prejudicial, unfair, misleading, confusing evidence) Costs and probability of error are both important here. We now have a framework that can guide us to reasonable answers to questions such as these (and many others). 27/11/08 Process_B

Should the Ontario Court of Appeal hear such a case? Example: a court judge in Florida finds a snowmobile operator liable for $1,000 damage to a neighbour’s property under Florida Highway Traffic act. The defendant (snowmobile operator) believes that this judgement is incorrect because the Highway Traffic Act should not apply to snowmobiles. The defendant appeals to the Florida Court of Appeal requesting that it hear his appeal. The Appeal court declines (the appeal with cost $100,000 in court resources). The point is that maybe the lower court committed an error but the cost of determining whether or not an error was committed outweighs the potential social costs of an error. How many snowmobile are there in Florida? Should the Ontario Court of Appeal hear such a case? 27/11/08 Process_B