? What does a consumer's utility-maximizing optimum look like?
I. Introduction
A. The relationship between law and economics
2. Combining law and economics (cont'd.)
b. Criticisms of the economic analysis of law (cont'd.)
(2) Efficiency is a deficient
assessment criterion
"repulsive normative underpinnings"
(Posner 25)
(2.1) Income distribution also
matters
"Suppose that pituitary extract is in very
scarce supply relative to the demand and is therefore very expensive. A poor family has a
child who will be a dwarf if he does not get some of the extract, but the family cannot
afford the price and could not even if they borrow against the child’s future
earnings as a person of normal height; for the present value of those earnings net of
consumption is less than the price of the extract. A rich family has a child who will grow
to normal height, but the extract will add a few inches, and his parents decide to buy it
for him. In the sense of value used in this book, the pituitary extract is more valuable
to the rich than to the poor family because value is measured by willingness to pay, but
the extract would confer greater happiness in the hands of the poor family than in the
hands of the rich one."
"As this example shows, the term efficiency when used as in this
book to denote those allocations in which value is maximized, has limitations as an
ethical criterion of social decisionmaking." (Posner 11)
Amartya Sen: efficiency itself is not such "a momentous achievement from the point of view of social welfare. A person who starts off ill-endowed may stay poor and deprived even after...[trading] and if being...[efficient]...is all that competition offers, the propertyless may be forgiven for not regarding the achievement as a 'big deal.'" (LEA 27)
Responses:
(i) Hard to use the common law to redistribute wealth
--Litigants are a heterogeneous mix of rich and poor.
--Unpredictable consequences: "arrangements we try to impose may
be bargained away" (ex: tax incidence)
--"a change in law will alter the
distribution of wealth only to the extent that the change is unanticipated and affects the
demand for specialized resources." (P 84)
--Large distortions of incentives: Common law
facilitates voluntary transactions, so reactions to legal decisions can work to offset
original rule
--"[I]f property law favors farmers over
ranchers, some rich ranchers may switch to farming to gain valuable legal rights. In
contrast, a comprehensive income tax precludes people from reducing their tax liability by
changing the source of their income." (CU 112)
(ii) Efficient common law increases the size of the pie available for redistribution
(iii) Better methods for
redistribution exist
24: "An alternative argument for efficient law is that, even
when legal rules can be used to redistribute, there are better tools available, such as
taxation. If so, it may be sensible to use the legal system to maximixe the size of the
pie and leave the legislature and the IRS the job of cutting it."
Kaplow, Louis, and Steven. "The Efficiency of the
Legal System versus the Income Tax in redistributing Income.".Journal of Legal
Studies 23 ((June 1994): 667-681.
--attorney fees vs. accountant fees for
income taxes (C&L)
(2.2) The law concerns justice, not efficiency
Response: Justice does not have to be
incompatible with efficiency
Economic analysis does not ignore "justice."
It does not consider distributive justice, but another type of justice is efficiency.
(Posner 27)
"There is more to justice than economics." (Posner 28)
--Efficiency considerations can be
useful without being determinative
--Critiquing economic efficiency requires understanding it
(3) Law provides an alternative to the market, not a complement
Fundamental critiques handout (summarize each in one sentence)
Response: Humility
We are looking only at a part of the law
--laws which are intended to make markets function better
--other laws intentionally alter market outcomes--tax laws for example
--even for those, economists can shed light on trade-offs and side
effects
--but economists can assess only means, not ends
We may be
affected by our perspective
Some economists have done studies to learn what
circumstances promote cooperation among people and what types of people tend to cooperate
most. The typical experiment involves setting people up in prisoner's dilemma situations
in which, if the affected parties cooperate they maximize their joint product, but each
party also has individual incentives to defect or cheat and better him or herself at the
expense of the group. Interestingly, it seems that economists are more likely to defect
and act on their individual incentives to the detriment of the group than the general
population. (Gerald Maxwell & Ruth E. Ames, "Economists Free Ride; Does Anyone
Else?" Journal of Public Economics 15 (1981): 295.)
However, it seems that this tendency to act on individual incentives is
more an identifying feature of people who choose to study economics rather than a
characteristic that is learned in the study of economics since underclassmen in economics
display the characteristic with almost the same frequency as upperclassmen in economics.
(John R. Carter & Michael P. Irons, "Are Economists Different, and If So,
Why?" Journal of Economic Perspectives 5 (1991): 171. (LEA 65)
c. The benefits of law for economics
(1) Makes us confront complicated real-world issues.
In Econ250, firms used resources to produce output--assumed away all the complications
14: "The more you think about them [property issues], the clearer it becomes that what you own is not a piece of land but a bundle of rights related to a piece of land."
(2) Challenges economic principles
"burgeoning literature on how actual human behavior sometimes differs from the predictions of rational choice theory" (much coming from legal academy as well as psychology, econ, other social sciences) (Cooter and Ulen)
"In the coming years, lawyer-economists will be wise to investigate the benefits of complicating the rational-actor model by admitting two notions: the frailty of human cognition and the possibility of a self-enforced altruism arising from the influence of culture." (LEA 79)
B. Review of microeconomic theory (Friedman: explanation)Friedman: explanation)
Positive vs. Normative
See handout
1. Maximizing behavior, efficiency and markets
"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.
| (1)
Individuals act to maximize their welfare ? What does a consumer's utility-maximizing optimum look like? |
|
(2) 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.
Little would ever get done if policies were
implemented only when they are Pareto improving.
Most changes create both winners and losers.
Revised criterion in practice
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
Focuses on gains versus losses rather than winners
and losers.
Kaldor-Hicks criterion underlies benefit-cost analysis.
(3) Markets typically promote efficiency (Friedman details)
| ? What does a market equilibrium look like? Buyer gets a benefit > the price Show: TB, TE, CS |
|