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Part A-I An Introduction to Law and Economics

Part A-I An Introduction to Law and Economics. What is the economic analysis of law?. Positive predictions Normative standards for evaluating laws Framework for economic analysis of the law Some examples. Lawmakers and judges often ask two fundamental questions:

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Part A-I An Introduction to Law and Economics

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  1. Part A-IAn Introduction to Law and Economics Intro_A

  2. What is the economic analysis of law? • Positive predictions • Normative standards for evaluating laws • Framework for economic analysis of the law • Some examples Intro_A

  3. Lawmakers and judges often ask two fundamental questions: “How will a given sanction (law) affect behaviour of individuals?” “How will a given sanction (law) affect society as a whole?” Economic theory should be able to provide relatively rigorous answers to this type of question Positive predictions Intro_A

  4. Economic theory should be able to predict what a utility or profit maximizing economic agent will do. • Economic theory contains concepts of efficiency which can help establish criteria for ensuring maximum societal well-being. This last statement will be qualified Intro_A

  5. Normative standards for evaluating laws • Laws are instruments for achieving specific social goals, which in turn are premised on social values. • There really is no positive theory of optimal social goals. • Nonetheless, economic theory can assess the extent to which a given law will achieve the stated social goals Intro_A

  6. What society judges to be ‘good’ or ‘bad’ - socially desirable outcomes - distribution of wellbeing across individual members of society • There is no positive theory of optimal income distribution (distribution of wellbeing) Intro_A

  7. Economic theory can help make the pie as big as possible (efficiency – a positive concept) • Economic theory cannot help decide on who should get what size slice of the pie (distribution – a normative concept) • However positive economic theory can help assess how well society is achieving its stated normative goals Intro_A

  8. Framework for economic analysis of the law Institution --> Behaviour --> Outcome Economic agents make decisions within a given institutional setting (some specific set of laws) The optimizing behaviour of economic agents is restricted by the given institutional setting and this affects their optimal choice We are interested in the outcome for society as a whole - resulting from the optimizing behaviour of individual agents under a given institutional setting (set of laws) Intro_A

  9. The Paradigm: Institution --> Behaviour --> Outcome Institution - the law, regulations, sanctions Behaviour - of utility/profit maximizing individuals subject to the institutional constraints Outcome - impact of individual behaviour on societal well-being Intro_A

  10. Some examples The following are some examples more fully detailed in the lecture notes (on line) Review the examples briefly. We will deal with them in detail when we cover specific topics Intro_A

  11. Sanctions affect behaviour - WSIB FOR 41-230 only • Society might benefit from someone breaking a contract – the steel mill • Who should be responsible for the weather? – the power company Intro_A

  12. For each example consider the following questions • What is society trying to achieve? • Whose behaviour is being manipulated? • How does the law affect the behaviour of the individuals or firms? Intro_A

  13. Justice ? The ‘law’ and the concept of ‘justice’ (fairness, equitableness, righteousness) are often treated as synonymous Can economics help in assessing the extent to which a given law is JUST? Not really JUSTICE is a normative notion rooted deeply in the value system of individuals, or society Although it is a (the?) fundamental principle underlying our legal system, JUSTICE is a concept beyond economics Fortunately, what is often accepted as JUST in Western (most?) societies, is often what is economically efficient Intro_A

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