A. How civil suits work (finish)

    Example: sample civil suit
    Render your verdict.

    Outcome: This is an example of a tort case--we cover torts in the last part of the course.

B. The relationship between law and economics

    Course focus:
    Common law--judge-made law

    Common law areas:
    Property law deals with the ownership of things. "real property: such as land and buildings and "intangible property" such as intellectual property.
    Contract law deals with voluntary agreements.
    Tort law deals with harms--injuries to someone's person or property resulting from the actions of someone else.

    Contract right applies only to the parties involved, property rights and torts apply to all without their consent
    Property law applies to rights associated with objects
    Tort law applies to rights associated with a person
    110: The 3 areas overlap (nuisance = tort+property; breach=contract+tort; lease=property+contract)

    France: threw out common law with French Revolution, since judges and king were considered corrupt.
    Resulting alternative: Napoleanic Code, 1804
    Based on the "The Body of the Civil Law," 528-534, Roman Emperor Justinian.
    Civil law is more common than common law--in most of WEur, Wn Hemis; Asia, Puerto Rico. Common law in places colonized by Britain.
    Common law findings refer to precedent and social norms; civil law decisions are based on references to meaning of code.
    Examples of civil law in the US: Louisiana; Uniform Commercial Code

    Both law and economics have been around for centuries
    But "law and economics" is < 50 years old.
    Economics turns out to have quite a lot to say about the law.

    Write down the first thing that comes to mind when you hear the word "economics"

1. Markets v. Courts

    ? What do markets do?

    Markets facilitate voluntary transactions

    ? What do courts do?

    Courts resolve disputes (involuntary transactions)

    The link: courts can use the common law to create "a legal framework for voluntary transactions." (Friedman)

2. Lawyers v. Economists

    ? What were the parties and the lawyers directly involved in the coffee case concerned about?
    "The only question in which the parties and their lawyers are interested and the only question the judge and jury will decide is whether the cost of the injury should be shifted from [plaintiff to defendant], whether, that it is, it is ‘just’ or ‘fair’ that plaintiff should receive compensation." (Posner 17)

    ? What do you consider to be the relevant costs involved in this case, aside from litigation expenses?

    ? By the time of the complaint and the case, how would an economist classify these costs?

    ? What's the usual advice economists give about costs of this sort?

    ? So why might economists ever care about cases of this sort?
    "The economist is interested in methods of preventing future accidents that are not cost-justified and thus reducing the sum of accident and accident-prevention costs, but the parties to the litigation have no interest in the future." (Posner 17)

    Lawyers see the law as a system to award ex post (after the fact) damages
    Economists see the law as a system of ex ante incentives

    Law and economics is the study of how rational individuals respond to the incentives created by legal rules.

    The Posner Thesis: "The common law is best (not perfectly) explained as a system for maximizing the wealth of society." (Posner 25)
    Posner might be wrong--do judges have an incentive to make efficient decisions?

3. What economic analysis of law can do

    (1) Analyze existing legal rules
    Example: Three-strikes law
    Thomas More, Utopia, 1516: "and it is plain and obvious that it is absurd and of ill consequence to the commonwealth that a thief and a murderer should be equally punished; for if a robber sees that his danger is the same if he is convicted of theft as if he were guilty of murder, this will naturally incite him to kill the person whom otherwise he would only have robbed; since, if the punishment is the same, there is more security, and less danger of discovery, when he that can best make it is put out of the way; so that terrifying thieves too much provokes them to cruelty."
    --Marginal analysis

    (2) Assist in the choice of legal rules
    Start with objective and assess how well alternative legal rules work

    Example:
    ? What is the more efficient penalty: fines or prison?
    Example: more cost efficient to use fines first, and use prison only after fines option has been exhausted. (C&U 5)

    Try to be more efficient
    -increase wealth, the size of the pie

    (3) Provide professional assistance

    (i) Technical support--expert testimony
    (ii) Empirical methodology--econometrics

C. Review of how markets work (Friedman: explanation)

See: worksheet on Applying microeconomics to the economic analysis of the law

1. Markets and efficiency

    "maximizing behavior, market equilibrium, and stable preferences, used relentlessly and unflinchingly, form the heart of the economic approach...."
    Becker, Gary S. The Economic Approach to Human Behavior. Chicago: University of Chicago Press, 1976, 3-14. Reprinted in O&V: 8-10.

    (2) Markets typically promote efficiency (Friedman details)

    (3) A situation is efficient when it is Pareto optimal
    Pareto optimal => it is impossible to make anyone better off without making someone else worse off.

    The Pareto efficiency criterion: a change is welfare-improving if it makes at least one person better off without making anyone else worse off.

    The Kaldor-Hicks efficiency criterion: a change is welfare-improving if the winners gain more than the losers lose.
    => the change is potentially Pareto-improving (the gains could be redistributed to achieve Pareto efficiency)

    Focuses on gains versus losses rather than winners and losers.
    Kaldor-Hicks criterion underlies benefit-cost analysis.