Chapter 01. Introduction

Chapter 01. Introduction - Chapter 1 Introduction The study...

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Chapter 1 Introduction Introduction 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, and tort. 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. Of 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 refined. 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 legal remedies. 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, problems. 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. The law 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. In economics, that message translates into incentive structure . 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.
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This note was uploaded on 10/05/2008 for the course ECN 450 taught by Professor Deserpa during the Fall '08 term at ASU.

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Chapter 01. Introduction - Chapter 1 Introduction The study...

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