Economic analysis of law looks at how law as an institution shapes the incentives of individuals and firms, looks at how risk is allocated, and how resources are segregated.
The figure most associated in law and economics, or economic analysis of the law is Richard Posner who’s general contribution was that common law is and should be economically efficient, meaning that it is at least kaldor-hicks efficient if not pareto efficient.
It seems hard to believe that people would disagree with the idea of the law being something that aims to fulfill the most good for the most people generally, but concerns about rationality, blame, and edge cases make some opposed to economic analysis of the law on the margins.
Posner’s book on Takings essentially argues that when the government seizes property, they should be responsible for compensating the owners for the value associated with what the property would have previously been able to be used for, even in limited circumstances.
For example, if building an airport near a neighborhood would prevent a man from keeping his 20 foot high HAM radio, because of potentially interfering with air traffic controllers, then the man should be compensated for the exact difference in value associated from the ‘taking’ of his right, or bundle of sticks. If compensated more or less than the corresponding value, this would incentivize government to steal from peter to help paul or vice versa, rather than maximizing the total welfare function.
An interesting early example of the economic analysis being at use is the calculus of negligence, from Judge Learned Hand.
Hand’s basic idea was that negligence’s duty was
If probability of something bad happening, multiplied by the magnitude of the delivery is bigger than the cost to adequately protect against the bad thing happening, the person who allowed harm to happen should be responsible for damages.
This idea essentially tries to minimize harm ex post facto, to encourage efficient decision making before the fact.
Another interesting way that the law interacts with economics is through the idea of assigning proportional risk to people’s actions.
Let’s say I’m a super bad driver, and it’s super obvious that I’m bad. My tail lights are busted… I am swerving over. No other cars go near me.
It’s good that I’m avoiding crashes, but if everyone drove like me, that would be bad and perilous.
At the same time, if all liability goes to punish me, if someone else drives in such a way that results in damages, when they could avoid it, it would also result in an inefficient outcome.
Thus, liability should be proportional to the risk someone causes, and encourages everyone to take precautions rather than just one actor.
Isadore Johnson's Website 