Economic Analysis of Law

The Economic Analysis of Law (sometimes called ‘Law and Economic Studies’ or ‘L&E’) applies economic principles (specifically microeconomic theory) to the analysis of the common law. While at first glance the Economic Analysis of Law may appear to be similar to a Marxist approach, however the two concepts come from quite different perspectives – put simply the Economic Analysis of law is of utilitarian focus whereas the Marxist approach focuses on class and social structures, similar to that of Critical Legal Studies.
Positive Law and Economics is based on the analysis of economic principles to law to predict the outcome of legal principles. The next logical step is the theory of Normative Law and Economics which takes the principles of Positive Law and of Economics to make policy suggestions based on the economic consequences of legal policies.

Pareto Efficiency
Named after the Italian economist Vilfredo Pareto, a result is considered to be ‘Pareto efficient’ if at least one person is made better off and no person suffers a detriment. Greatest efficiency is achieved when no further improvements can be made without adversely affecting another.

Kaldor-Hicks Efficiency
Much like the additional step the Normative Law and Economics takes ahead of Positive Law and Economics, Kaldor-Hicks Efficiency takes that step from Pareto Efficiency. Named after British economists Nicholas Kaldor and John Hicks, the concept understands that it is very (if not impossible) for policies to benefit everyone without adversely affecting others. The Kaldor-Hicks Efficiency requires only that those who benefit from the action can compensate those who suffered detriment.
The result is that the Economic Analysis of Law measures the cost of transactions of law. It is a concept of cost-and-benefit. For example in Australia various states passed Civil Liability Acts (and other legislation) as a response to insurance issues arising from incidences such as car accidents and the insurance claims arising from them which could then potentially affect all road users. Ultimately the Economic Analysis of Law looks at the result of government action.

Prominent Thinkers:

Brian Bix     Ronald Coase     Richard Posner

See Also:

Libertarianism     Rule of Law