notes

to anchor discussion of economic theory in concrete, numerous, and varied legal questions

part I: an introduction

The nature of economic reasoning

Economics is the science of rational choice in a world where resources are limited inrelation to human wants, not limited to the market. ——If rationality is not confined to explicit market transactions but is a general and dominant characteristic of social behavior, then the conceptual apparatus constructed by generations of economists to explain market behavior can be used to explain non-market behavior as well.The concept of man as a rational maximizer of his self-interest implies that people respond to incentives — that if a person’s surroundings change in such a way that he could increase his satisfactions by altering his behavior, he will do so. From this proposition derive the three fundamental principles of economics:

1. The first is the inverse relation between price charged and quantity demanded (the Law of Demand)

2. Sellers seek to maximize the difference between their costs and their sales revenues; but for the moment we are interested only in the lowest price that a rational self-interested seller would charge. That minimum is the price that the resources consumed in making (and selling) the seller’s product would command in their next best use — the alternative price. This discussion of cost may help dispel one of the most tenacious fallacies about economics — that it is about money. On the contrary, it is about resource use, money being merely a claim on resources.

The economist distinguishes between transactions that affect the use of resources, whether or not money changes hands, and purely pecuniary transactions — transfer payments.

A price above opportunity cost is a magnet drawing resources into the production of the good until the increase in output drives price, by the Law of Demand, down to the level of cost

3.The third basic economic principle is that resources tend to gravitate toward their most valuable uses if voluntary exchange — a market — is permitted.If the magnet doesn’t work, the economist takes this as a sign not that people are dumb or have weird tastes or have ceased to be rational maximizers but that there are barriers to the free flow of resources. The barrier could be high information costs, externalities, inherent scarcities as in our rent-of-land example, or other economic conditions discussed in this book.

Value, utility and efficiency

The economic value of something is how much someone is willing to pay for it or, if he has it already, how much money he demands to part with it.

Efficiency: allocation of resources in which value is maximized

Normative and Positive Economic Analysis of Law

Normative analysis: to clarify value conflicts and to point the way toward reaching given social ends by the most efficient path

As for the positive role, Although few judicial opinions contain explicit references to economic concepts, often the true grounds of legal decision are concealed rather than illuminated by the characteristic rhetoric of opinions. Indeed, legal education consists primarily of learning to dig beneath the rhetorical surface to find those grounds, many of which may turn out to have an economic character.The theory is that the common law is best (not perfectly) explained as a system for maximizing the wealth of society.

Once the frame of reference is thus expanded beyond the immediate parties to the case, justice and fairness assume broader meanings than what is just or fair as between this plaintiff and this defendant. The issue becomes what is a just and fair result for a class of activities, and it cannot be sensibly resolved without consideration of the impact of alternative rulings on the frequency of accidents and the cost of accident precautions.

part II: The common law

The Economic Theory of Property Rights: Static and Dynamic Aspects

Legal protection of property rights creates incentives to use resources efficiently. If every piece of land is owned by someone — if there is always someone who can exclude all others from access to any given area — then individuals will endeavor by cultivation or other improvements to maximize the value of land.

Efficiency requires a mechanism by which the farmer can be induced to transfer the property to someone who can work it more productively; a transferable property right is such a mechanism.

Problems in the Creation and Enforcement of Property Rights

The pattern by which property rights emerge and grow in a society is related to increases in the ratio of the benefits of property rights to their costs. Property rights are costly to enforce ,thus less exclusive and less universal than they would be.