1. Economics in the Law Introduction

2. What is the study of economics and the law? Why study economics and the law? What is the purpose of the law? What is socially efficient production? What is a Pareto Optimum?

3. Law and Economics Economic analysis of the law –The use of economics to study the effects of actual legal rules. (explanatory) –The use of economics to determine optimal, or most efficient, legal rules. (proactive) –Law and economics holds that law can guide people’s behavior into socially desirable channels. (normative) –We assume that individuals seek to inform themselves about what the law requires of them and then conform their behavior to the dictates of the law. –Some lawyers and economists believe that efficiency guides the evolution of the law

4. Law and Economics Why study economics and the law? An opportunity to apply economic analysis to the real world and real world problems Economics often plays an important role in litigation Economists and lawyers tend to think alike Many undergraduates in economics go on to law school

5. Law and Economics What is the purpose of the law? To promote justice To promote efficiency Does it do either?

6. We will concentrate on whether the law can be efficiency enhancing. That means avoiding value judgments whenever possible. Avoid questions of: –Fairness –Justice –Social justice –Inequality

7. What is a socially efficient solution? Maximizes joint profits (welfare), total output, or the size of the pie. Does not necessarily maximize profits for any individual player Jeremy Bentham proposed the “happiness principle” –The greatest good for the greatest number –Maximize social utility

8. Pareto Optimum Because interpersonal comparisons of utility are not possible, we may settle for a Pareto optimum. Starts with given wealth distribution –Fairness of initial distribution is irrelevant If a value enhancing exchange is possible, we are not at a Pareto optimum Each distribution of wealth has a corresponding Pareto optimum Does a Pareto Optimum maximize welfare? (only given the initial distribution and no interpersonal comparisons of utility )

9. The Jelly Bean Economy Distribute a package containing 5 jelly beans to each child in class Each package contains randomly selected flavors of jelly beans. A few packages may have all licorice flavored beans or lemon flavored beans Now allow the children to engage in trade

10. Will this result in a Pareto Optimum? Will each child end up with 5 jelly beans? Will each child be equally happy with the final outcome? Will some children feel they have made bad trades? Will some children feel that the initial distribution was unfair? Will any child be worse off after trading?

11. Four Topical Areas Property Contracts Torts Criminal(not to be covered)

12. Property What is property? What is an efficient allocation of property rights? Does the assignment of property rights have an impact on efficiency? How do penalties for violating property rights affect efficiency? What is the Coase Theorem?

13. Contracts What are the essential properties of a contract? –Contracts involve mutual promises –Contracts promise future performance Does contract law determine efficiency? A broken promise breaches a contract. When is it efficient to breach? –What are the remedies for efficient breaches? Morality versus efficiency in the enforcement of contracts.

14. Torts (unintentional) Tort law defines reciprocal obligations with regard to performance when contracts are not possible. What is an unintentional tort? Damages internalize externalities. Efficient damage rules Compensatory and punitive damages

15. Criminal Law When torts are not enough Optimal deterrence Optimal sentencing

16. This is Not a Course in the Law We are concerned with generalized legal rules that may differ by time period or jurisdiction. We are concerned with hypothetical legal rules. If you need to know the law, consult a lawyer.

17. Common law versus civil law Common law –Based on precedent, but may change over time –Attempts to incorporate changing mores and social values Civil law –Based on codes established by government –Trumps common law