Law and Economics

Introduction: The law and economics movement applies economic theory and method to the practice of law. It asserts that the tools of economic reasoning offer the best possibility for justified and consistent legal practice. Law is best understood as a tool to promote economic efficiency. But how can the institution of law help encourage efficient transactions? One way is to help avoid situations that lead to market failure. One example of market failure is the existence of monopolies: a situation where one party is able to extract more profit from a good than a healthy market would allow. Law can be used as a tool to ensure that monopoly situations are hard to bring about and maintain. Another way legal systems can be used to ensure economically efficient transactions is through the enforcement of valid contracts. By ensuring compliance with contractual terms courts can give parties to a contract confidence that the other party will fulfill the agreed-to obligations. This becomes especially important in situations where the parties must complete their obligations at different times.

Basic Concept of Law and Economics: Law and economics or economic analysis of law is the application of economic theory (specifically microeconomics theory) to the analysis of law that begins mostly with scholars from the University of Chicago. Economic concepts are used to explain the effects of laws, to assess which legal rules are economically efficient, and to predict which legal rules will be promulgated.

As used by lawyers and legal scholars, the phrase "law and economics" refers to the application of microeconomics 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, constitutional economics and political science.

                ● Political economy is a term used for studying production and trade, and their relations with law, custom, and government, as well as with the distribution of national income and wealth.

                ● Constitutional economics is a research program in economics and constitutionalism that has been described as extending beyond the definition of "the economic analysis of constitutional law" in explaining the choice "of alternative sets of legal-institutional-constitutional rules that constrain the choices and activities of economic and political agents." This is distinct from explaining the choices of economic and political agents within those rules, a subject of "orthodox" economics.

                ● Constitutionalism is "a complex of ideas, attitudes, and patterns of behavior elaborating the principle that the authority of government derives from and is limited by a body of fundamental law".

                ● Fundamental Law is the fundamental physical laws of the universe (based on repeated scientific experiments and observations over many years and which have become accepted universally within the scientific community).

As early as in the 18th century, Adam Smith discussed the economic effects of mercantilist legislation. However, to apply economics to analyze the law regulating non market activities is relatively.

Positive law and normative law with 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 would predict the effects of a strict liability rule as opposed to the effects of a negligence rule. Positive law and economics has also at times purported to explain the development of legal rules, for example the common law of torts, in terms of their economic efficiency.

On the other hand

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, in particular, allocative efficiency.

● Allocative efficiency is a state of the economy in which production represents 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 marginal cost of producing. In the single-price model, at the point of allocative efficiency, price is equal to marginal cost.

Positive constitutional economics: Within positive constitutional economics, the tools or methods are unique from normal economic tools because of the cross-discipline nature of the program. The main tool of positive constitutional economics is "comparative institutional analysis", 

with four main elements. The first element examines how certain constitutional rules arose and what factors caused the rules to be developed as a result of aggregated individual inputs. 

The second element looks at how rules are distinguishable between individual and collective factors, though Voigt acknowledges this research method is rarely used.

 The third element is the possibilities of further constitutional (or rules) change. Any proposed change to constitutional constraints, or rules of constraints, are subject to economic scrutiny for their effects on efficiency and equity. 

The fourth element of positive constitutional economics examines the economic effects of developed or modified change to rules.

Normative constitutional economics:  Normative constitutional economics focuses on legitimizing the state and its actions as the best means of maximum efficiency and utility, judging conditions or rules that are efficient, and discerning and studying the political systems to maximize efficiency, where the outcome of collective choices are considered "fair", "just", or "efficient". Once again, Buchanan dominates the normative discussion of constitutional economics, specifically how methodological individualism affects economic analysis.