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Faculty of law, BA,LLB

Economics Assignment

Relation between Economics and Law

SUBMITTED TO: Mr. Shekhar tokas

SUBMITTED BY: YASH BHARDWAJ

ENROL. NO: 201201017

BATCH: BA LLB (3rd SEMESTER)

INTRODUCTION

The economic analysis of law, sometimes known as "law and economics," varies from other types of legal analysis in two ways. The theoretical examination begins with an emphasis on efficiency. Simply put, a legal situation is efficient if a right is granted to the party ready to pay the highest price for it. There are two independent theories of legal efficiency, and both are supported by law and economics specialists. The positive theory of legal efficiency holds that the common law is effective, whereas the normative theory holds that the law should be efficient. It is critical that the two theories coexist. Law and economics stresses that markets are more efficient than courts. When possible, the legal system, according to the positive theory, will force a transaction into the market. When this is impossible, the legal system attempts to “mimic a market” and guess at what the parties would have desired if markets had been feasible. History and significance Modern law and economics dates from about 1960, when Ronald Coase (who later received a Nobel Prize) published “The Problem of Social Cost.” Gordon Tullock and Friedrich Hayek also wrote in the area, but the expansion of the field began with

redistribution is inefficient because it has COSTS associated with it) (1) Imprecise targeting: the income tax precisely targets inequality, whereas redistribution by private legal rights relies on crude averages Ex: assume a court interprets a law to favor consumers over corporations in order to redistribute income from rich to poor: consumers and investors imperfectly correspond to “poor” and “rich” – consumers of Ferraris tend to be relatively rich, while many small businesses are organized as corporations (2) Unpredictable consequences: The distributive effects of reshuffling private rights are hard to predict the courts can’t be confident that holding corporation liable to its consumers will reduce the wealth of its stockholders: perhaps the crop will pass on its higher costs to consumers in the form of higher prices, in which case the court’s holding will redistribute costs from some consumers to other consumers (3) High Transaction costs: the transaction costs of redistribution through private legal rights are typically high Plaintiff’s attorneys routinely charge 1/3 of judgment, if D’s attorney collects similar amount in hourly fees, the attorneys for the two sides will absorb 2/3 of the stakes in dispute (4) Distortions in incentives: Redistribution by private law distorts the economy more than progressive taxation does Assume law to benefit consumers of tomatoes causes a decline in the return enjoyed by investors in tomato farms: investors will respond by withdrawing funds from the tomato farms and

investing in other businesses—consequently, the supply of tomatoes will be too small and consumers will pay too high a price for them - For these reasons, economists who favor redistribution and economists who oppose it can agree that private legal rights are usually the wrong way to pursue distributive justice. Economics conceives of laws as incentives for changing behavior (implicit prices) and as instruments for policy objectives (efficiency & distribution). WHY SHOULD LAWYERS STUDY ECONOMICS? WHY SHOULD ECONOMISTS STUDY LAW? Economics helps in understanding the negative externalities in various law subjects. Economics helps in understanding tax laws, company laws, consumer protection laws and property laws. Laws related to limited resources can only be understood by having a basic knowledge of Economics. Economists and lawyers can also learn techniques from each other. From economists, lawyers can learn quantitative reasoning for making theories and doing empirical research. From lawyers, economists can learn to persuade ordinary people—an art that lawyers continually practice and refine. Lawyers can describe facts and give them names with moral resonance, whereas economists are obtuse to language too often.