Course:Law3020/2014WT1/Group E/Critical Legal Studies Critical Race Theory

Law and Economics

The theory of law and economics believes that laws are a means of promoting and facilitating efficiency. The theory finds that laws live or die to the extent that they create and nurture efficiency. Similar to Legal Positivism, which uses morality to gauge the validity of laws, Law and Economics believe that society should use efficiency to gauge whether a law is valid or not. Ultimately good and valid legal rules are ones that are efficient.

Law and economics define efficiency as the maximization of economic wealth. Accordingly a transaction will be considered efficient if its result is a net increase in wealth maximization. Wealth in this context is not limited to money, but includes all measureable satisfaction. As long as the satisfaction resulting from the transactions can be measured and assigned a value then it will be included into social wealth. The ultimate purpose of laws is to be used as a tool to facilitate wealth-maximizing transactions, or to step out of the way to allow them to occur.

While the law and economic theory relies on laws to facilitate wealth-maximizing transactions, it also relies on the belief that human behaviour is rational. Therefore once laws provide the opportunity for wealth maximizing transactions to occur, the belief is that humans will make decisions in their best interest to increase the net value (pareto-superior).

Rational and efficient transactions are ones in which benefit both parties to it, however each transactions may also create consequential costs on third parties. The negative costs that impact people outside of the transactions are described as externalities. In order to prevent these externalities from flowing outside the transaction, governments pass legislations, which for example require parties to the transaction to pay production and transaction costs, or compensate their neighbors.

The idea of costs can also be seen in negligence within tort law. Similar to the idea of externalities, costs in negligence cases are borne by the wrongdoer, fall on the victim and then must be compensated for by the tortfeasor, to push the costs back on to the creator. Accordingly the purpose of damages in tort is to shift the losses, and ultimately deter people from acting unreasonably. If people who do not take reasonable caution to avoid harming others do not have to “pay” for that creation of risk, and it materialises as harm to another, the creation of risk is “discounted” (and artificially encouraged), and therefore results in an inefficient outcome (the benefit to D is not having to be careful).

Law and Economics theory also utilizes the notion of the creation of risk and resulting inefficient costs, to establish the rationale behind vicarious liability. In cases of vicarious liability the defendant is not responsible for any unlawful conduct, and is free from personal blameworthiness and yet they are still required to compensate for damages suffered by the plaintiff. If only fault is required to establish liability then the principle of vicarious liability seems to make little sense. However if the creation of risk also become an element to establish liability then it would appear that vicarious liability seems like a more sensible concept. An employer will be (vicariously) liable for the torts of his employee if the act in question was: a wrongful act authorized by the employer, or a wrongful and unauthorized mode of doing some act authorized by the master. Employers have control over their employees activity, which may create risk. Accordingly, they should bare the burden of costs, as incentive to reduce any potential risks.

Application to K.L.B. v. B.C.

The theory of law and economics believes that laws are a means of promoting and facilitating efficiency. The theory finds that laws live or die to the extent that they create and nurture efficiency. Similar to Legal Positivism, which uses morality to gauge the validity of laws, Law and Economics believe that society should use efficiency to gauge whether a law is valid or not. Ultimately good and valid legal rules are ones that are efficient.

Law and economics define efficiency as the maximization of economic wealth. Accordingly a transaction will be considered efficient if its result is a net increase in wealth maximization. Wealth in this context is not limited to money, but includes all measureable satisfaction. As long as the satisfaction resulting from the transactions can be measured and assigned a value then it will be included into social wealth. The ultimate purpose of laws is to be used as a tool to facilitate wealth-maximizing transactions, or to step out of the way to allow them to occur.

While the law and economic theory relies on laws to facilitate wealth-maximizing transactions, it also relies on the belief that human behaviour is rational. Therefore once laws provide the opportunity for wealth maximizing transactions to occur, the belief is that humans will make decisions in their best interest to increase the net value (pareto-superior).

Rational and efficient transactions are ones in which benefit both parties to it, however each transactions may also create consequential costs on third parties. The negative costs that impact people outside of the transactions are described as externalities. In order to prevent these externalities from flowing outside the transaction, governments pass legislations, which for example require parties to the transaction to pay production and transaction costs, or compensate their neighbors.

The idea of costs can also be seen in negligence within tort law. Similar to the idea of externalities, costs in negligence cases are borne by the wrongdoer, fall on the victim and then must be compensated for by the tortfeasor, to push the costs back on to the creator. Accordingly the purpose of damages in tort is to shift the losses, and ultimately deter people from acting unreasonably. If people who do not take reasonable caution to avoid harming others do not have to “pay” for that creation of risk, and it materialises as harm to another, the creation of risk is “discounted” (and artificially encouraged), and therefore results in an inefficient outcome (the benefit to D is not having to be careful).

Law and Economics theory also utilizes the notion of the creation of risk and resulting inefficient costs, to establish the rationale behind vicarious liability. In cases of vicarious liability the defendant is not responsible for any unlawful conduct, and is free from personal blameworthiness and yet they are still required to compensate for damages suffered by the plaintiff. If only fault is required to establish liability then the principle of vicarious liability seems to make little sense. However if the creation of risk also become an element to establish liability then it would appear that vicarious liability seems like a more sensible concept. An employer will be (vicariously) liable for the torts of his employee if the act in question was: a wrongful act authorized by the employer, or a wrongful and unauthorized mode of doing some act authorized by the master. Employers have control over their employees activity, which may create risk. Accordingly, they should bare the burden of costs, as incentive to reduce any potential risks.