Course:Law3020/2014WT1/Group X/Law As Efficiency

Law and Economics

Lady Justice

Introduction

Under the Economic Approach to law, legal rules are evaluated by their ability to maximize efficiency. The normative claim of the economic approach is that these rules are justified by their efficiency. This efficiency is measured by the ability of these rules to maximize wealth, either in the monetary sense, or the social sense. When measuring a gain in social wealth, we may use the test of Pareto- Superiority.

Test of Pareto-Superiority

A state is pareto-superior when its’ people are better off or when it is preferred over another state. There are win-win bargains, under which the people of both states are better off, and win-lose bargains that see the people of one state better off than another who is compensated for this loss. When there are no further moves that may be done to benefit others without making another worse off, it is Pareto-Optimal.

Markets and Externalities

According to the rational-man theory, transactions that are voluntary will always be pareto-superior due to the fact that no rational action will choose a loss for which he is not compensated. An individual will always attempt to make a transaction in which they either win, stay the same or lose but are compensated for the loss.

Issues arise when you take in the idea of externalities. Externalities are by-products of a particular transaction which can yield positive or negative results. In some situations a third party not privy to the transactions is burdened with the negative externalities without any positives being yield from the transaction.

Kaldor-Hicks Test

In contrast, The Kaldor-Hicks test allows the winner to compensate the loser so that no one would be worse off than they were and at least one person would be better off than they were in the original state.

The goal in the Kaldo-Hicks Test is the overall maximization of wealth. If the gains of the winner are large enough that they would be able to compensate the loser while still being able to attain a profit, the transaction could be deemed an efficient one.

Economic Approach to Tort Law

When we examine the case of E.B. v Order of the Oblates, we must take into consideration the economic approach to tort law. Under this approach, the goal is not to eliminate all accidents or losses, but to ensure that there is an efficient level of accidents and an efficient distribution of their costs. However, if the cost to prevent harm interferes so that the loss in convenience is too high, then we must take a different approach.

The vicarious liability as seen in this case is based on a breach that is committed by someone the defendant has given authority to. The majority in E.B. decided that the connection between what the employer was asking the employee to do and the unlawful conduct must be strong before vicarious liability may be imposed. In not finding vicarious liability in this case, the majority was seeking to prevent an inefficient distribution of costs, in that it would be too costly in the future by reducing the efficiency of the Judicial system by opening the floodgates for similar cases. The precautions taken against future accidents must be cost-justified, in that the resources of the courts must be protected.

The Bazley test is used in this case to determine who can be compensated for the sake of efficiency. This required that features of Saxey’s employment itself contributed to his ability to materialize the risk. However, under the negligence rule, not finding liability did not create any incentive for employers to reduce the likelihood and costs of such incidents. It does not provide deterrence for employers who are operating in such an environment that inherently produces a high risk.

Dissenting Opinion

The dissent in this case, however, did not place as much emphasis upon the economic theory as much as they emphasized the idea of morality. It was easier for them to find vicarious liability because they did not consider the total cost of future accidents. Nonetheless, their approach may have followed the negligence rule more effectively in that their result would have created an incentive to reduce the likelihood of these incidents happening. More responsibility found on the part of the employer would increase the likelihood that employers would take precaution to avoid this harm.

Conclusion

The holding in this case may have been more economically inefficient by preventing possible administrative costs, however there is no pareto-superiority in this case, because there is no increase in social wealth on the part of the plaintiff. It may have been possible had direct liability been possible; this would have led to the church benefiting by protecting their reputation, and it would have enabled the victim to be compensated for their loss from the individual who contributed to it.