Law & Econs Flashcards
History of Law & Economics
conservative/libertarian reaction against Dworkin’s legal liberalism (fairness/justice)
1) conservatives do not like redistributive and cost implications
2) libertarians do not like the faith Dworkin puts in governmental interventionism
Advantages of replacing with economic analysis
Economics is a science that uses formal theory to formulate precise hypotheses and using empirical testing to determine if they are true
Two schools of economics
Macroeconomics and microeconomics
Macroeconomics
studies the behavior of a country and how its policies affect the economy as a whole. It analyzes entire industries and economies, rather than individuals or specific companies
Microeconomics
the study of decisions made by people and businesses regarding the allocation of resources and prices of goods and services. It also takes into account taxes, regulations, and government legislation
Most prominent school is of neoclassical economics
focus is on how dynamics of supply and demand effect the output and distribution of material goods and services
At a macroeconomic level, law and econs relies on neo-institutional economics
that explores how various governmental structures, most particular protection of property rights and contracts, contribute to national economic development
Chicago School of Law of Economics
particular focus is on using neoclassic economic analysis to explore examples of regulation creating perverse incentive structures that actively prevent particular markets from maximizing social welfare
Characteristics of Chicago School
1) positivist/descriptive
2) concerned with maximizing aggregate social welfare
3) not concerned with distributional issues
4) strong belief in innate capacity of free markets to maximize social welfare
5) strong distrust of regulatory intervention.
Utility
can be measured by the price that individual is willing to pay for the thing
Social Welfare
The aggregate utility found in a collective (ie., the summing up of the utility of all individual members)
often equated with wealth
Efficiency
the degree to which one is able extract utility or social welfare from a finite set of resources: something is more efficient to the extent it is able to secure greater utility using a fixed amount of resources
There are 3 types: productive efficiency, allocative efficiency, dynamic efficiency
Productive efficiency
How much one is able to produce from a finite set of resources
Allocative efficiency
how well are a fixed amount of resources distributed so as to maximize social welfare
Dynamic efficiency
ability to maintain productive efficiency in the face of significant changes in the environment/consumer demand
Efficiency gains
One of the core goals of economics is to find ways of improving efficiency in the generation of social welfare
There are 2 types: Kaldor Hicks, Pareto
Kaldor-Hicks efficiency
Production of social welfare is maximised.
similar to utilitarianism
Pareto efficiency
A situation where the only way to make one person better off is to make another person worse off
A Pareto improvement is a change that makes someone better off without making anyone else worse off (only winners, no losers)
A market
a place where two parties can gather to facilitate the exchange of goods and/or services
a few examples: commodities market, political market, regulatory markets, spontaneous markets
Three fundamental laws of human behaviour
1) The Utility Function: Human beings are driven to maximize utility
2) Rationality Assumption: People base their actions on rational and realistic understandings of cause and effect
3) An individual is the best judge of how much utility a particular thing contributes to her utility
This portrays an ‘economic man’
Purposes of Law according to law and economics
1) Construct markets that maximize social welfare
2) Construct market-like devices that maximize social welfare
3) Prevent market failure
What Law & Economics does as a legal theory
A. Map out the incentive structures created by a particular regulatory field and how they affect market behavior
B. Identify sources of market imperfection and appropriate legal response to same
C. Identify aspects of social activity that would benefit from marketization
D. Identify heretofore unrecognized markets and their regulatory implications
Critique of Law & Economics
A. Econs is not a science
B. Lack of empirical testing
C. Too simplistic to describe reality
D. Ignores issues of distribution
Principal findings of behavioral law and economics
(1) that as an empirical matter, and rationality is relatively bounded
(2) that this boundedness comes in the form of a particular set of irrational behavioural biases; and
(3) that these particular biases are innate to all human beings
