Law Schools » Legal Theory » Law and Economics

Law and Economics


Law and economics

"Law and economics" is the economic analysis of the law. It is a come near to legal theory that applies techniques of economics to law. The most evident application of economics to law is in relation to competition law.  However, the field is much wider. All government policy is embedded in laws so law and economics includes the economic analysis of regulation and public policy more generally.  Subjects contain the behavior of regulated firms, the political economy of legislation and legislative procedures, law and finance, company finance and governance and industrial organization, corporate law, responsibility for accidents, property law, contracts and litigation.

It contains the use of economic concepts to clarify the effects of laws, to review which legal rules are economically efficient, and to presage which legal rules will be promulgated. Economic analysis of law is generally separated into two subfields, positive and normative.

Positive law and economics

Positive law and economics employs economic analysis to presage the effects of diverse legal rules. So, for example, a positive economic examination of tort law would predict the effects of a severe responsibility rule as opposed to the effects of a negligence rule. Positive law and economics has also at times pretended to explicate the progress of legal rules, for example the common law of torts, in terms of their economic efficiency.

Normative law and economics

Normative law and economics established upon the efficiency criterion and makes policy advice based on the economic consequences of diverse policies. The key theory for normative economic analysis is efficiency, in particular, allocate efficiency.

The feeblest theory of efficiency used by law and economics scholars is Pareto efficiency. A legal rule is Pareto efficient if it could not be modified so as to make one person better off without making another person worse off. (By weak, economists mean that Pareto efficiency makes very few normative adoptions, not that it is sustained by weak discussions.) A stronger notion of efficiency is Kaldor-Hicks efficiency. A legal rule is Kaldor-Hicks efficient if it could be made Pareto efficient by a part payment.

In the United States, most judges distinguish that the significance of economic analysis for resolving policy issues and analyzing probable reasons for business behavior.  Economic analysis of law has been tremendously influential. Judicial opinions employ economic analysis and the theories of law and economics with some regularity. The influence of law and economics has also been felt in legal education. The field of law and economics has become so important in North America, Europe, and Asia that many of the top law schools have PhD economists on their staff. In addition, many professional economists now study and write on the relationship between economics and legal doctrine.