I. Introduction
? All top law schools now have a faculty member from
what outside discipline?
? What outside approach to legal analysis is now cited most often in
law journals?
? What subdiscipline did the winners of the 1991 and 1992 Nobel Prize
in economics help establish? (Coase and Becker--Economic Analysis of Law)
? What is the scholarly field of Supreme Court Justice Stephen Breyer?
? What is the only undergraduate major that has a statistically
significant association with higher-salaried lawyers? (12.7% > benchmark, political
scientists) -- Craft
and Baker: Excerpts
Economics turns out to have quite a lot to say about
the law.
Law is a huge subject, too much for one term
Course focus:
Common law--judge-made law: property, contracts, torts
(injuries)
Antitrust law--a type of criminal law, made by statute
Why? You will likely confront these laws as a good-faith law-abiding participant in the marketplace
Both law and economics have been around for centuries
But "law and economics" is just over 40 years old.
Major name Richard
Posner
Judge: US Court of Appeals for the 7th District
Senior lecturer: University of Chicago Law School
Author: Economic Analysis of Law. 1st edition: 1973.
6th edition: 2003
Your advantage--you have the edge over lawyers:
F12: "An economics student who has thoroughly mastered
price theory is equipped to deal with very nearly every problem to which economic theory
gives a clear answer, with the result that many of the courses offered by an ecoomics
department are simply applications of price theory."
F12: "[O]nce you understand property, or contract, or tort from
the point of view of economics, you have done most of the work toward understanding any of
the others."
Law students have to start over again for new law areas.
A. The relationship between law and economics
1. The apparent incompatibility between economics and law
(1) Markets v. Courts
? What do markets do?
Markets facilitate voluntary transactions
? What do courts do?
Courts resolve disputes (involuntary transactions)
(2) Lawyers v. Economists
Example:
hot
coffee
2/2/1992: 79-year-old Stella Liebeck of New
Mexico spills a 170-degree cup of McDonald's coffee on her lap while trying to get the lid
off.
She suffers third-degree burns.
She complains to McDonald's and asks reimbursement for her
out-of-pocket expenses -- about $2,000 -- plus the lost wages of her daughter who stayed
home with her. According to the family, McDonald's offered $800.
She hires attorney S. Reed Morgan and sues McDonald's.
? What are the parties and the
lawyers directly involved in this 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?
Rent seeking = spending resources to
acquire wealth transfers from others
The term was coined by Anne Krueger to describe competition for
government favors. She estimated that India and Turkey used 5-10% of GNP on rent seeking
for import permits. (Friedman 33)
? Is litigation just rent seeking?
34: Litigation is not purely rent-seeking if it ends up
helping to lead to more efficient behavior.
? 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
Postscript to Liebeck case:
Dr. Charles Baxter, a renowned burn expert from Southwestern
Medical School in Dallas...testified that coffee at 170 degrees would cause second-degree
burns within 3.5 seconds of hitting the skin.
Christopher Appleton, a quality-assurance supervisor at McDonald's
headquarters, testified that the company had not lowered the heat under the coffee despite
receiving 700 burn complaints over 10 years. Safety consultant Robert Knaff asserted that
700 complaints -- which amounted to about one in 24 million cups -- was "basically
trivially different from zero."
A jury awarded her $ 2.9 million after a trial; a judge knocked that
down to $ 640,000.
2. Combining law and economics (Palgrave article)
The law provides a set of rules to
peacefully resolve conflicts.
Economics provides a set of tools to analyze decision making.
The economic analysis of law applies the tools of economics to the rules of the legal system
Key assumption of economics: individuals are rational
? What does it mean to be rational?
=> individuals make choices that
they expect will increase their benefits more than their costs
(Friedman
price theory: implications of individual rationality)
Some law and economics courses cover criminal law.
Sorry, we're not, except for right now.
Criminals behave differently from the rest of us.
? Are criminals rational? (Friedman:
criminals
are rational)
? What is your evidence?
Rationality => people respond to incentives
13: rationality can be "a pessimistic assumption when
applied to people who are supposed to be acting in someone else's interests, such as
judges or legislators."
Law and economics is about how rational individuals respond to the incentives created by legal rules.
Some useful economic tools:
(1) Benefit-cost decision making
(2) Market incentives
(3) Marginal analysis
(4) Game theory
(5) Public choice