The study of law and economics is concerned with how legal rules, regulations, and precedents
interact with the market mechanism to influence the allocation of resources.
This book of cases
narrows the scope to its primary focus of inquiry, the common law fields of property, contract,
In relation to the cases that we are about to analyze, the primary objectives are to
explain, to predict, and to evaluate.
The unifying framework for moving toward these objectives
is the efficiency hypothesis.
In that context, the economic analysis of a case – or more
specifically, a set of cases with similar facts and circumstances – promotes a clearer
understanding of why the law has evolved as it has.
Inasmuch as the common law is continually
evolving through legal precedent, a thorough understanding of prior outcomes paves the way to
predicting future outcomes and to evaluating their potential impact upon societal welfare.
In relation to the vast economic arena, in which millions of producers, workers, and consumers
interact on a daily basis, it is nothing short of miraculous that more disputes do not arise.
those that do arise, only a fraction actually go to court and most of those that end up in court
involve rules of law and procedure that might be regarded as routine.
The ones that are difficult
and controversial comprise the great economic margins, where old principles are applied and
As applied to common law cases, economic analysis is a systematic examination of the
environment and motivations that preceded the dispute and the potential effects of alternative
Familiar principles (at least to students of economics) of rationality, choice,
prices, and incentive structure are brought to bear on a range of unusual, if not truly bizarre,
It is here that legal and economic analysis bear striking similarities:
(1) Whereas legal scholars search for precedent, economic scholars search for models and
economic principles, but both are seeking a broader framework or context in which to cast
the unusual problem into more familiar light.
(2) Just as the law expects all citizens to act reasonably and responsibly, economic theory
expects all “agents” to act rationally, with rationality broadly defined in relation to the full
expected consequences of their actions.
(3) The strongest link between law and economics is an eye toward the future.
places a strong emphasis upon the “message” that the judicial outcomes send out to others
who might have to make decisions in analogous circumstances in the future.
that message translates into
Collectively, the application of economic principles, the emphasis upon individual rationality,
and the nexus between law and incentive structures point toward an economic hypothesis about
the common law.
Reduced to bare bones, the economic objective of the common law is to create
a set of incentives that encourage efficient behavior.