Law and economics, or economic analysis of law, is the application of

microeconomic theory Microeconomics is a branch of mainstream economics that studies the behavior of individuals and firms in making decisions regarding the allocation of scarce resources and the interactions among these individuals and firms. Microeconomics foc ...

to the analysis of

law Law is a set of rules that are created and are enforceable by social or governmental institutions to regulate behavior,Robertson, ''Crimes against humanity'', 90. with its precise definition a matter of longstanding debate. It has been vario ...

, which emerged primarily from scholars of the

Chicago school of economics The Chicago school of economics is a neoclassical school of economic thought associated with the work of the faculty at the University of Chicago, some of whom have constructed and popularized its principles. Milton Friedman and George Stig ...

Economic An economy is an area of the production, distribution and trade, as well as consumption of goods and services. In general, it is defined as a social domain that emphasize the practices, discourses, and material expressions associated with th ...

concepts are used to explain the effects of laws, to assess which legal rules are

economically efficient In microeconomics, economic efficiency, depending on the context, is usually one of the following two related concepts: * Allocative efficiency, Allocative or Pareto efficiency: any changes made to assist one person would harm another. * Productiv ...

, and to predict which legal rules will be

promulgated Promulgation is the formal proclamation or the declaration that a new statutory or administrative law is enacted after its final approval. In some jurisdictions, this additional step is necessary before the law can take effect. After a new law ...

. There are two major branches of law and economics; one based on the application of the methods and theories of

neoclassical economics Neoclassical economics is an approach to economics in which the production, consumption and valuation (pricing) of goods and services are observed as driven by the supply and demand model. According to this line of thought, the value of a good ...

to the positive and normative analysis of the law, and a second branch which focuses on an institutional analysis of law and legal institutions, with a broader focus on economic, political, and social outcomes, and overlapping with analyses of the institutions of politics and governance.

History

Origin

The historical antecedents of law and economics can be traced back to the classical economists, who are credited with the foundations of modern economic thought. As early as the 18th century,

Adam Smith Adam Smith (baptized 1723 – 17 July 1790) was a Scottish economist and philosopher who was a pioneer in the thinking of political economy and key figure during the Scottish Enlightenment. Seen by some as "The Father of Economics"——� ...

discussed the economic effects of

mercantilist Mercantilism is an economic policy that is designed to maximize the exports and minimize the imports for an economy. It promotes imperialism, colonialism, tariffs and subsidies on traded goods to achieve that goal. The policy aims to reduc ...

legislation; later,

David Ricardo David Ricardo (18 April 1772 – 11 September 1823) was a British political economist. He was one of the most influential of the classical economists along with Thomas Malthus, Adam Smith and James Mill. Ricardo was also a politician, and a ...

opposed the British

Corn Laws The Corn Laws were tariffs and other trade restrictions on imported food and corn enforced in the United Kingdom between 1815 and 1846. The word ''corn'' in British English denotes all cereal grains, including wheat, oats and barley. They wer ...

on the grounds that they hindered agricultural productivity; and

Frédéric Bastiat Claude-Frédéric Bastiat (; ; 30 June 1801 – 24 December 1850) was a French economist, writer and a prominent member of the French Liberal School. A member of the French National Assembly, Bastiat developed the economic concept of opportu ...

, in his influential book '' The Law'', examined the unintended consequences of legislation. However, to apply economics to analyze the law regulating nonmarket activities is relatively new. A European law & economics movement around 1900 did not have any lasting influence. Harold Luhnow, the head of the

Volker Fund Volker may refer to: * Volker (name), including a list of people with the given name or surname * Volker, Kansas City, a historic neighborhood in Kansas City * Volker Boulevard, Kansas City * ''Alien Nations'' (German: ''Die Völker''), a real-time ...

, not only financed

F. A. Hayek Friedrich August von Hayek ( , ; 8 May 189923 March 1992), often referred to by his initials F. A. Hayek, was an Austrian–British economist, legal theorist and philosopher who is best known for his defense of classical liberalism. Haye ...

in the U.S. starting in 1946, but he shortly thereafter financed

Aaron Director Aaron Director (; September 21, 1901 – September 11, 2004) was a Russian-born American economist and academic who played a central role in the development of the field Law and Economics and the Chicago school of economics. Director was a profe ...

's coming to

the University of Chicago The University of Chicago (UChicago, Chicago, U of C, or UChi) is a private research university in Chicago, Illinois. Its main campus is located in Chicago's Hyde Park neighborhood. The University of Chicago is consistently ranked among the be ...

in order to set up there a new center for scholars in law and economics. The University was headed by

Robert Maynard Hutchins Robert Maynard Hutchins (January 17, 1899 – May 14, 1977) was an American educational philosopher. He was president (1929–1945) and chancellor (1945–1951) of the University of Chicago, and earlier dean of Yale Law School (1927–1929). His& ...

, a close collaborator of Luhnow's in setting up the Chicago School, as it became commonly known. The university faculty then included a strong base of libertarian scholars, including

Frank Knight Frank Hyneman Knight (November 7, 1885 – April 15, 1972) was an American economist who spent most of his career at the University of Chicago, where he became one of the founders of the Chicago School. Nobel laureates Milton Friedman, George ...

George Stigler George Joseph Stigler (; January 17, 1911 – December 1, 1991) was an American economist. He was the 1982 laureate in Nobel Memorial Prize in Economic Sciences and is considered a key leader of the Chicago school of economics. Early life and e ...

, Henry Simons,

Ronald Coase Ronald Harry Coase (; 29 December 1910 – 2 September 2013) was a British economist and author. Coase received a bachelor of commerce degree (1932) and a PhD from the London School of Economics, where he was a member of the faculty until 1951. ...

and

Jacob Viner Jacob Viner (3 May 1892 – 12 September 1970) was a Canadian economist and is considered with Frank Knight and Henry Simons to be one of the "inspiring" mentors of the early Chicago school of economics in the 1930s: he was one of the leading fig ...

. Soon, it would also have not just Hayek himself, but Director's brother-in-law and Stigler's friend

Milton Friedman Milton Friedman (; July 31, 1912 – November 16, 2006) was an American economist and statistician who received the 1976 Nobel Memorial Prize in Economic Sciences for his research on consumption analysis, monetary history and theory and the ...

, and also Robert Fogel, Robert Lucas, Eugene Fama, Richard Posner, and

Gary Becker Gary Stanley Becker (; December 2, 1930 – May 3, 2014) was an American economist who received the 1992 Nobel Memorial Prize in Economic Sciences. He was a professor of economics and sociology at the University of Chicago, and was a leader of ...

. Historians Robert van Horn and

Philip Mirowski Philip Mirowski (born 21 August 1951 in Jackson, Michigan) is a historian and philosopher of economic thought at the University of Notre Dame. He received a PhD in Economics from the University of Michigan in 1979. Career In his 1989 book ''More ...

described the development of modern economic concepts in "The Rise of the Chicago School of Economics", a chapter of ''The Road from Mont Pelerin ''(2009); and historian Bruce Caldwell (a great admirer of von Hayek) filled in more details of the account in his chapter, "The Chicago School, Hayek, and Neoliberalism", in ''Building Chicago Economics'' (2011). The field began with Gary Becker’s 1968 paper on crime (Becker also received a Nobel Prize). In 1972, Richard Posner, a law and economics scholar and the major advocate of the positive theory of efficiency, published the first edition of Economic Analysis of Law and founded ''

The Journal of Legal Studies ''The Journal of Legal Studies'' is a law journal published by the University of Chicago Press focusing on interdisciplinary academic research in law and legal institutions. It emphasizes social science approaches, especially those of economics, ...

'', both are regarded as important events. Gordon Tullock and Friedrich Hayek also wrote intensively in the area and influenced to spread of law and economics.

Founding

In 1958, Director founded ''The'' ''Journal of Law & Economics'', which he co-edited with Nobel laureate

, and which helped to unite the fields of law and economics with far-reaching influence. In 1960 and 1961, Ronald Coase and Guido Calabresi independently published two groundbreaking articles, "

The Problem of Social Cost "The Problem of Social Cost" (1960) by Ronald Coase, then a faculty member at the University of Virginia, is an article dealing with the economic problem of externalities. It draws from a number of English legal cases and statutes to illustrate Co ...

" and "Some Thoughts on Risk Distribution and the Law of Torts". This can be seen as the starting point for the modern school of law and economics. In 1962, Aaron Director helped to found the Committee on a Free Society. Director's appointment to the faculty of the University of Chicago Law School in 1946 began a half-century of intellectual productivity, although his reluctance about publishing left few writings behind. He taught antitrust courses at the law school with

Edward Levi Edward Hirsch Levi (June 26, 1911 – March 7, 2000) was an American law professor, academic leader, and government lawyer. He served as dean of the University of Chicago Law School from 1950 to 1962, president of the University of Chicago from ...

, who eventually would serve as Dean of Chicago's Law School, President of the University of Chicago, and as U.S. Attorney General in the Ford administration. After retiring from the

University of Chicago Law School The University of Chicago Law School is the law school of the University of Chicago, a private research university in Chicago, Illinois. It is consistently ranked among the best and most prestigious law schools in the world, and has many dis ...

in 1965, Director relocated to California and took a position at Stanford University's

Hoover Institution The Hoover Institution (officially The Hoover Institution on War, Revolution, and Peace; abbreviated as Hoover) is an American public policy think tank and research institution that promotes personal and economic liberty, free enterprise, a ...

. He died September 11, 2004, at his home in Los Altos Hills, California, ten days before his 103rd birthday.

Later development

In the early 1970s,

Henry Manne Henry G. Manne (May 10, 1928 – January 17, 2015) was an American writer and academic, considered a founder of the law and economics discipline. He was Dean Emeritus of the George Mason University School of Law. Born in New Orleans, Louisiana, M ...

(a former student of Coase) set out to build a center for law and economics at a major

law school A law school (also known as a law centre or college of law) is an institution specializing in legal education, usually involved as part of a process for becoming a lawyer within a given jurisdiction. Law degrees Argentina In Argentina, ...

. He began at the

University of Rochester The University of Rochester (U of R, UR, or U of Rochester) is a private research university in Rochester, New York. The university grants undergraduate and graduate degrees, including doctoral and professional degrees. The University of ...

, worked at the

University of Miami The University of Miami (UM, UMiami, Miami, U of M, and The U) is a private research university in Coral Gables, Florida. , the university enrolled 19,096 students in 12 colleges and schools across nearly 350 academic majors and programs, i ...

, but was soon made unwelcome, moved to

Emory University Emory University is a private research university in Atlanta, Georgia. Founded in 1836 as "Emory College" by the Methodist Episcopal Church and named in honor of Methodist bishop John Emory, Emory is the second-oldest private institution of ...

, and ended up at

George Mason George Mason (October 7, 1792) was an American planter, politician, Founding Father, and delegate to the U.S. Constitutional Convention of 1787, one of the three delegates present who refused to sign the Constitution. His writings, including ...

. The last soon became a center for the education of judges—many long out of law school and never exposed to numbers and economics. Manne also attracted the support of the

John M. Olin Foundation The John M. Olin Foundation was a conservative American grant-making foundation established in 1953 by John M. Olin, president of the Olin Industries chemical and munitions manufacturing businesses. Unlike most other foundations, it was charg ...

, whose support accelerated the movement. Today, Olin centers (or programs) for Law and Economics exist at many universities.

Chicago School notable figures

Modern forerunners of economic thought developed at the Chicago School include

, and

. Founders include: *

University of Chicago The University of Chicago (UChicago, Chicago, U of C, or UChi) is a private research university in Chicago, Illinois. Its main campus is located in Chicago's Hyde Park neighborhood. The University of Chicago is consistently ranked among the b ...

, University of Chicago, 1991

Nobel Memorial Prize in Economic Sciences The Nobel Memorial Prize in Economic Sciences, officially the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel ( sv, Sveriges riksbanks pris i ekonomisk vetenskap till Alfred Nobels minne), is an economics award administered ...

* Richard Posner, University of Chicago * Guido Calabresi,

Yale University Yale University is a private research university in New Haven, Connecticut. Established in 1701 as the Collegiate School, it is the third-oldest institution of higher education in the United States and among the most prestigious in the w ...

. Calabresi, judge for the U.S. Court of Appeals for the Second Circuit, wrote in depth on this subject; his book '' The Costs of Accidents: A Legal and Economic Analysis'' (1970) has been cited as influential in its extensive treatment of the proper incentives and compensation required in accident situations. Calabresi took a different approach in ''Ideals, Beliefs, Attitudes, and the Law'' (1985), where he argued, "who is the cheapest avoider of a cost, depends on the valuations put on acts, activities and beliefs by the whole of our law and not on some objective or scientific notion" (69). *

George Mason University George Mason University (George Mason, Mason, or GMU) is a public research university in Fairfax County, Virginia with an independent City of Fairfax, Virginia postal address in the Washington, D.C. Metropolitan Area. The university was origin ...

Other notable individuals include: *

Nobel Memorial Prize The Nobel Memorial Prize in Economic Sciences, officially the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel ( sv, Sveriges riksbanks pris i ekonomisk vetenskap till Alfred Nobels minne), is an economics award administered ...

–winning economist and a leader of the

Chicago School of Economics The Chicago school of economics is a neoclassical school of economic thought associated with the work of the faculty at the University of Chicago, some of whom have constructed and popularized its principles. Milton Friedman and George Stig ...

* Frank Easterbrook, U.S. Court of Appeals for the Seventh Circuit judge *

Andrei Shleifer Andrei Shleifer ( ; born February 20, 1961) is a Russian-American economist and Professor of Economics at Harvard University, where he has taught since 1991. Shleifer was awarded the biennial John Bates Clark Medal in 1999 for his seminal works i ...

* Robert Cooter * Harold Demsetz * Hans-Bernd Schäfer * William Landes *

W. Kip Viscusi William (W. Kip) Viscusi (born 1949) is an American economist whose primary fields of research are the economics of risk and uncertainty, risk and environmental regulation, behavioral economics, and law and economics. Viscusi is the University Di ...

* A. Mitchell Polinsky * Michael Trebilcock

Positive and normative law and economics

Economic analysis of law is usually divided into two subfields: positive and normative.

Positive law and economics

'Positive law and economics' uses economic analysis to predict the effects of various legal rules. So, for example, a positive economic analysis of

tort law A tort is a civil wrong that causes a claimant to suffer loss or harm, resulting in legal liability for the person who commits the tortious act. Tort law can be contrasted with criminal law, which deals with criminal wrongs that are punishab ...

would predict the effects of a

strict liability In criminal and civil law, strict liability is a standard of liability under which a person is legally responsible for the consequences flowing from an activity even in the absence of fault or criminal intent on the part of the defendant. ...

rule as opposed to the effects of a

negligence Negligence (Lat. ''negligentia'') is a failure to exercise appropriate and/or ethical ruled care expected to be exercised amongst specified circumstances. The area of tort law known as ''negligence'' involves harm caused by failing to act as ...

rule. Positive law and economics has also at times purported to explain the development of legal rules, for example the

common law In law, common law (also known as judicial precedent, judge-made law, or case law) is the body of law created by judges and similar quasi-judicial tribunals by virtue of being stated in written opinions."The common law is not a brooding omniprese ...

of torts, in terms of their economic efficiency.

Normative law and economics

''Normative law and economics'' goes one step further and makes policy recommendations based on the economic consequences of various policies. The key concept for normative economic analysis is

efficiency Efficiency is the often measurable ability to avoid wasting materials, energy, efforts, money, and time in doing something or in producing a desired result. In a more general sense, it is the ability to do things well, successfully, and without ...

, in particular,

allocative efficiency Allocative efficiency is a state of the economy in which production is aligned with consumer preferences; in particular, every good or service is produced up to the point where the last unit provides a marginal benefit to consumers equal to the mar ...

. A common concept of efficiency used by law and economics scholars is

Pareto efficiency Pareto efficiency or Pareto optimality is a situation where no action or allocation is available that makes one individual better off without making another worse off. The concept is named after Vilfredo Pareto (1848–1923), Italian civil engi ...

. A legal rule is Pareto efficient if it could not be changed so as to make one person better off without making another person worse off. A weaker conception of efficiency is Kaldor–Hicks efficiency. A legal rule is Kaldor–Hicks efficient if it could be made Pareto efficient by some parties compensating others as to offset their loss. Nonetheless, the possibility of a clear distinction between positive and normative analysis has been questioned by Guido Calabresi who, in his book on "The future of Law and Economics" (2016: 21-22), believes that there is an "actual - and unavoidable - existence of value judgments underlying much economic analysis" Uri Weiss proposed this alternative: "It is common in law and economics to search for the law that will lead to the optimal outcome, providing the maximum size 'pie,' and to think about maximizing happiness instead of minimizing pain. We prefer another approach: We do not try to identify games that will lead to the optimal result but to prevent games in which it is in the best interests of the players to come to an unjust result".

Criminal law

In 1968, Gary Becker, who would later win the Nobel prize for economics, published ''Crime and Punishment: An Economic Approach''. This work relied on the economic concept of utility as the basic unit of analysis. In 1985, in ''An Economic Theory of the Criminal Law'', Posner set out an alternative approach that relied instead on wealth as the basic unit of analysis.

Relationship to other disciplines and approaches

As used by

lawyer A lawyer is a person who practices law. The role of a lawyer varies greatly across different legal jurisdictions. A lawyer can be classified as an advocate, attorney, barrister, canon lawyer, civil law notary, counsel, counselor, solicit ...

s and legal scholars, the phrase "law and economics" refers to the application of microeconomic analysis to legal problems. Because of the overlap between legal systems and political systems, some of the issues in law and economics are also raised in

political economy Political economy is the study of how economic systems (e.g. markets and national economies) and political systems (e.g. law, institutions, government) are linked. Widely studied phenomena within the discipline are systems such as labour ...

constitutional economics Constitutional economics is a research program in economics and constitutionalism that has been described as explaining the choice "of alternative sets of legal-institutional-constitutional rules that constrain the choices and activities of econo ...

and

political science Political science is the scientific study of politics. It is a social science dealing with systems of governance and power, and the analysis of political activities, political thought, political behavior, and associated constitutions and ...

. Approaches to the same issues from

Marxist Marxism is a left-wing to far-left method of socioeconomic analysis that uses a materialist interpretation of historical development, better known as historical materialism, to understand class relations and social conflict and a dialecti ...

and

critical theory A critical theory is any approach to social philosophy that focuses on society and culture to reveal, critique and challenge power structures. With roots in sociology and literary criticism, it argues that social problems stem more from s ...

Frankfurt School The Frankfurt School (german: Frankfurter Schule) is a school of social theory and critical philosophy associated with the Institute for Social Research, at Goethe University Frankfurt in 1929. Founded in the Weimar Republic (1918–1933), dur ...

perspectives usually do not identify themselves as "law and economics". For example, research by members of the critical legal studies movement and the

sociology of law The sociology of law (legal sociology, or law and society) is often described as a sub-discipline of sociology or an interdisciplinary approach within legal studies. Some see sociology of law as belonging "necessarily" to the field of sociology, ...

considers many of the same fundamental issues as does work labeled "law and economics", though from a vastly different perspective. The law and political economy movement also analyzes similar concepts using an entirely different approach. The one wing that represents a non-neoclassical approach to "law and economics" is the Continental (mainly German) tradition that sees the concept starting out of the governance and public policy (''Staatswissenschaften'') approach and the German

Historical school of economics The historical school of economics was an approach to academic economics and to public administration that emerged in the 19th century in Germany, and held sway there until well into the 20th century. The professors involved compiled massive eco ...

; this view is represented in the ''Elgar Companion to Law and Economics'' (2nd ed. 2005) and—though not exclusively—in the ''European Journal of Law and Economics''. Here, consciously non-neoclassical approaches to economics are used for the analysis of legal (and administrative/governance) problems. Law and economics is closely related to jurimetrics, the application of

probability Probability is the branch of mathematics concerning numerical descriptions of how likely an event is to occur, or how likely it is that a proposition is true. The probability of an event is a number between 0 and 1, where, roughly speaking, ...

and

statistics Statistics (from German: '' Statistik'', "description of a state, a country") is the discipline that concerns the collection, organization, analysis, interpretation, and presentation of data. In applying statistics to a scientific, indust ...

to legal questions.

Applications

* Affirmative action ( Coate-Loury model) *

Antitrust law Competition law is the field of law that promotes or seeks to maintain market competition by regulating anti-competitive conduct by companies. Competition law is implemented through public and private enforcement. It is also known as antitrust ...

( Herfindahl–Hirschman Index) *

Calculus of negligence In the United States, the calculus of negligence, also known as the Hand rule, Hand formula, or BPL formula, is a term coined by Judge Learned Hand which describes a process for determining whether a legal duty of care has been breached (see n ...

Congestion pricing Congestion pricing or congestion charges is a system of surcharging users of public goods that are subject to congestion through excess demand, such as through higher peak charges for use of bus services, electricity, metros, railways, tele ...

Corporate governance Corporate governance is defined, described or delineated in diverse ways, depending on the writer's purpose. Writers focused on a disciplinary interest or context (such as accounting, finance, law, or management) often adopt narrow definitions ...

* Cost-benefit analysis **

Criminal law Criminal law is the body of law that relates to crime. It prescribes conduct perceived as threatening, harmful, or otherwise endangering to the property, health, safety, and moral welfare of people inclusive of one's self. Most criminal law ...

Mass surveillance in the United States The practice of mass surveillance in the United States dates back to wartime monitoring and censorship of international communications from, to, or which passed through the United States. After the First and Second World Wars, mass surveillance ...

Surveillance Surveillance is the monitoring of behavior, many activities, or information for the purpose of information gathering, influencing, managing or directing. This can include observation from a distance by means of electronic equipment, such as ...

*Crime enforcement *

Deregulation Deregulation is the process of removing or reducing state regulations, typically in the economic sphere. It is the repeal of governmental regulation of the economy. It became common in advanced industrial economies in the 1970s and 1980s, as a ...

(

Airlines An airline is a company that provides air transport services for traveling passengers and freight. Airlines use aircraft to supply these services and may form partnerships or alliances with other airlines for codeshare agreements, in whic ...

communications Communication (from la, communicare, meaning "to share" or "to be in relation with") is usually defined as the transmission of information. The term may also refer to the message communicated through such transmissions or the field of inquir ...

energy In physics, energy (from Ancient Greek: ἐνέργεια, ''enérgeia'', “activity”) is the quantitative property that is transferred to a body or to a physical system, recognizable in the performance of work and in the form of ...

, surface freight) *Design of contracts (

Contract theory From a legal point of view, a contract is an institutional arrangement for the way in which resources flow, which defines the various relationships between the parties to a transaction or limits the rights and obligations of the parties. From an ...

) ** Efficient breach *

Discrimination Discrimination is the act of making unjustified distinctions between people based on the groups, classes, or other categories to which they belong or are perceived to belong. People may be discriminated on the basis of Racial discrimination, r ...

Statistical discrimination (economics) Statistical discrimination is a theorized behavior in which racial or gender inequality results when economic agents (consumers, workers, employers, etc.) have imperfect information about individuals they interact with. According to this theory, ...

Drug policy A drug policy is the policy regarding the control and regulation of psychoactive substances (commonly referred to as drugs), particularly those that are addictive or cause physical and mental dependence. While drug policies are generally implemen ...

(

Iron law of prohibition The iron law of prohibition is a term coined by Richard Cowan in 1986 which posits that as law enforcement becomes more intense, the potency of prohibited substances increases. Cowan put it this way: "the harder the enforcement, the harder the d ...

) *

Evidence Evidence for a proposition is what supports this proposition. It is usually understood as an indication that the supported proposition is true. What role evidence plays and how it is conceived varies from field to field. In epistemology, evidenc ...

Evolution Evolution is change in the heritable characteristics of biological populations over successive generations. These characteristics are the expressions of genes, which are passed on from parent to offspring during reproduction. Variation ...

of the

(

Evolutionary game theory Evolutionary game theory (EGT) is the application of game theory to evolving populations in biology. It defines a framework of contests, strategies, and analytics into which Darwinian competition can be modelled. It originated in 1973 with John M ...

) *

Financial regulation Financial regulation is a form of regulation or supervision, which subjects financial institutions to certain requirements, restrictions and guidelines, aiming to maintain the stability and integrity of the financial system. This may be handle ...

(

Efficient market hypothesis The efficient-market hypothesis (EMH) is a hypothesis in financial economics that states that asset prices reflect all available information. A direct implication is that it is impossible to "beat the market" consistently on a risk-adjusted bas ...

) **

Fraud-on-the-market theory The fraud-on-the-market theory is the idea that stock prices are a function of all material information about the company and its business. It applies to securities markets, where it can be assumed that all material information is available to in ...

*Governance of the

commons The commons is the cultural and natural resources accessible to all members of a society, including natural materials such as air, water, and a habitable Earth. These resources are held in common even when owned privately or publicly. Commons c ...

** Tragedy of the commons * Institutional origins ** ''The Colonial Origins of Comparative Development: An Empirical Investigation'' **

Constitutional economics Constitutional economics is a research program in economics and constitutionalism that has been described as explaining the choice "of alternative sets of legal-institutional-constitutional rules that constrain the choices and activities of econo ...

** Legal origins theory **

Property rights The right to property, or the right to own property (cf. ownership) is often classified as a human right for natural persons regarding their possessions. A general recognition of a right to private property is found more rarely and is typically h ...

Intellectual property Intellectual property (IP) is a category of property that includes intangible creations of the human intellect. There are many types of intellectual property, and some countries recognize more than others. The best-known types are patents, co ...

( Economics and patents) *

Natural monopoly A natural monopoly is a monopoly in an industry in which high infrastructural costs and other barriers to entry relative to the size of the market give the largest supplier in an industry, often the first supplier in a market, an overwhelming adv ...

regulation ( Averch–Johnson effect) * Peltzman effect *

Principal–agent problem The principal–agent problem refers to the conflict in interests and priorities that arises when one person or entity (the "agent") takes actions on behalf of another person or entity (the " principal"). The problem worsens when there is a gre ...

Adverse selection In economics, insurance, and risk management, adverse selection is a market situation where buyers and sellers have different information. The result is that participants with key information might participate selectively in trades at the expe ...

Moral hazard In economics, a moral hazard is a situation where an economic actor has an incentive to increase its exposure to risk because it does not bear the full costs of that risk. For example, when a corporation is insured, it may take on higher risk ...

Quarantine A quarantine is a restriction on the movement of people, animals and goods which is intended to prevent the spread of disease or pests. It is often used in connection to disease and illness, preventing the movement of those who may have been ...

measures for

public health Public health is "the science and art of preventing disease, prolonging life and promoting health through the organized efforts and informed choices of society, organizations, public and private, communities and individuals". Analyzing the det ...

* Prudent investor rule (

Modern portfolio theory Modern portfolio theory (MPT), or mean-variance analysis, is a mathematical framework for assembling a portfolio of assets such that the expected return is maximized for a given level of risk. It is a formalization and extension of diversificati ...

) *

Rent control Rent regulation is a system of laws, administered by a court or a public authority, which aims to ensure the affordability of housing and tenancies on the rental market for dwellings. Generally, a system of rent regulation involves: *Price cont ...

Rent-seeking Rent-seeking is the act of growing one's existing wealth without creating new wealth by manipulating the social or political environment. Rent-seeking activities have negative effects on the rest of society. They result in reduced economic effic ...

Transaction costs In economics and related disciplines, a transaction cost is a cost in making any economic trade when participating in a market. Oliver E. Williamson defines transaction costs as the costs of running an economic system of companies, and unlike pro ...

(

Coase theorem In law and economics, the Coase theorem () describes the economic efficiency of an economic allocation or outcome in the presence of externalities. The theorem states that if trade in an externality is possible and there are sufficiently low tra ...

) * Value of a statistical life *

Voting systems An electoral system or voting system is a set of rules that determine how elections and referendums are conducted and how their results are determined. Electoral systems are used in politics to elect governments, while non-political elections m ...

(

Social choice theory Social choice theory or social choice is a theoretical framework for analysis of combining individual opinions, preferences, interests, or welfares to reach a ''collective decision'' or ''social welfare'' in some sense.Amartya Sen (2008). "Soci ...

) * Water law

Influence

The economic analysis of law has been influential in the United States as well as elsewhere. Judicial opinions use economic analysis and the theories of law and economics with some regularity, in the US but also, increasingly, in Commonwealth countries and in Europe. The influence of law and economics has also been felt in legal education, with graduate programs in the subject being offered in a number of countries. The influence of law and economics in civil law countries may be gauged from the availability of textbooks of law and economics, in English as well as in other European languages (Schäfer and Ott 2004; Mackaay 2013). Many law schools in North America, Europe, and Asia have faculty members with a graduate degree in economics. In addition, many professional economists now study and write on the relationship between economics and legal doctrines. Anthony Kronman, former dean of Yale Law School, has written that "the intellectual movement that has had the greatest influence on American academic law in the past quarter-century

f the 20th Century F, or f, is the sixth letter in the Latin alphabet, used in the modern English alphabet, the alphabets of other western European languages and others worldwide. Its name in English is ''ef'' (pronounced ), and the plural is ''efs''. Hist ...

is law and economics.

Criticisms

Despite its influence, the law and economics movement has been criticized from a number of directions. This is especially true of normative law and economics. Because most law and economics scholarship operates within a neoclassical framework, fundamental criticisms of neoclassical economics have been drawn from other, competing frameworks, though there are numerous internal critiques as well. Yet other schools of economic thought have emerged and have been applied to the work of law and economics in, for example, the work of Edgardo Buscaglia and Robert Cooter in the book "Law and Economics of Development".

Rational choice theory

Critics of the economic analysis of legal questions have argued that normative economic analysis does not capture the importance of

human rights Human rights are moral principles or normsJames Nickel, with assistance from Thomas Pogge, M.B.E. Smith, and Leif Wenar, 13 December 2013, Stanford Encyclopedia of PhilosophyHuman Rights Retrieved 14 August 2014 for certain standards of hu ...

and concerns for

distributive justice Distributive justice concerns the socially just allocation of resources. Often contrasted with just process, which is concerned with the administration of law, distributive justice concentrates on outcomes. This subject has been given considera ...

. Some of the heaviest criticisms of law and economics come from the critical legal studies movement, in particular Duncan Kennedy and Mark Kelman. Jon D. Hanson, of

Harvard Law School Harvard Law School (Harvard Law or HLS) is the law school of Harvard University, a private research university in Cambridge, Massachusetts. Founded in 1817, it is the oldest continuously operating law school in the United States. Each c ...

, argues that our legal, economic, political, and social systems are unduly influenced by an individualistic model of behavior based on

preferences In psychology, economics and philosophy, preference is a technical term usually used in relation to choosing between alternatives. For example, someone prefers A over B if they would rather choose A than B. Preferences are central to decision t ...

, instead of a model that incorporates

cognitive bias A cognitive bias is a systematic pattern of deviation from norm (philosophy), norm or rationality in judgment. Individuals create their own "subjective reality" from their perception of the input. An individual's construction of reality, not the ...

es and

social norm Social norms are shared standards of acceptable behavior by groups. Social norms can both be informal understandings that govern the behavior of members of a society, as well as be codified into rules and laws. Social normative influences or soci ...

Pareto efficiency

Additional criticism has been directed toward the assumed benefits of law and policy designed to increase

when such assumptions are modeled on "first-best" (

Pareto optimal Pareto efficiency or Pareto optimality is a situation where no action or allocation is available that makes one individual better off without making another worse off. The concept is named after Vilfredo Pareto (1848–1923), Italian civil engin ...

) general-equilibrium conditions. Under the theory of the second best, for example, if the fulfillment of a subset of optimal conditions cannot be met under any circumstances, it is incorrect to conclude that the fulfillment of ''any'' subset of optimal conditions will necessarily result in an increase in allocative efficiency. Consequently, any expression of public policy whose purported purpose is an unambiguous increase in allocative efficiency (for example, consolidation of

research and development Research and development (R&D or R+D), known in Europe as research and technological development (RTD), is the set of innovative activities undertaken by corporations or governments in developing new services or products, and improving existi ...

costs through increased

mergers and acquisitions Mergers and acquisitions (M&A) are business transactions in which the ownership of companies, other business organizations, or their operating units are transferred to or consolidated with another company or business organization. As an aspec ...

resulting from a systematic relaxation of antitrust laws) is, according to critics, fundamentally incorrect, as there is no general reason to conclude that an increase in allocative efficiency is more likely than a decrease. Essentially, the "first-best" neoclassical analysis fails to properly account for various kinds of general-equilibrium feedback relationships that result from intrinsic Pareto imperfections. Another critique comes from the fact that there is no unique optimal result. Warren Samuels in his 2007 book, ''The Legal-Economic Nexus'', argues, "efficiency in the Pareto sense cannot dispositively be applied to the definition and assignment of rights themselves, because efficiency requires an antecedent determination of the rights (23–4)".

Responses to criticism

Law and economics has adapted to some of these criticisms and been developed in a variety of directions. One important trend has been the application of

game theory Game theory is the study of mathematical models of strategic interactions among rational agents. Myerson, Roger B. (1991). ''Game Theory: Analysis of Conflict,'' Harvard University Press, p.&nbs1 Chapter-preview links, ppvii–xi It has appli ...

to legal problems. Other developments have been the incorporation of

behavioral economics Behavioral economics studies the effects of psychological, cognitive, emotional, cultural and social factors on the decisions of individuals or institutions, such as how those decisions vary from those implied by classical economic theory. ...

into economic analysis of law, and the increasing use of

statistical Statistics (from German: '' Statistik'', "description of a state, a country") is the discipline that concerns the collection, organization, analysis, interpretation, and presentation of data. In applying statistics to a scientific, industr ...

and

econometrics Econometrics is the application of statistical methods to economic data in order to give empirical content to economic relationships. M. Hashem Pesaran (1987). "Econometrics," '' The New Palgrave: A Dictionary of Economics'', v. 2, p. 8 p. ...

techniques. Within the legal academy, the term socio-economics has been applied to economic approaches that are self-consciously broader than the neoclassical tradition. Property rights, which are analyzed using economic analysis, are seen as fundamental human rights by defenders of law and economics.

References

External links

"Law and Economics"
article in the ''

Internet Encyclopedia of Philosophy The ''Internet Encyclopedia of Philosophy'' (''IEP'') is a scholarly online encyclopedia, dealing with philosophy, philosophical topics, and philosophers. The IEP combines open access publication with peer reviewed publication of original p ...

''
Law & Economics LAB

Paper describing the effects of law and economics on inequality
{{Authority control Philosophy of law