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

Law as Efficiency is a normative legal theory that is founded on the belief that law serves to promote efficiency and wealth maximization in society. Unlike the 'Natural Law' perspective, 'Law as Efficiency' does not include morality in its foundation. Under this aspect, it is similar to 'Legal Positivism'; one may evaluate laws according to morality but they are not created because of it.

Essence of Law as Efficiency

At the heart of this theory is rational wealth maximization, as established in liberal market economics. Accordingly, a law is valueable if it creates efficient outcomes. Consequently, an application of law ought to place society into a better position. These improvements can be measured by an overall evaluation of society's satisfaction, which includes monetary fulfilment, as well as emotional and physical satisfaction.

This theory assumes that humans are inherently rational and make decisions logically and in their best interest. They are free actors, who are at liberty to pursue their well-being. Ultimately, this leads to an increasingly improved state of existence for everyone. Liberal transactions will always position at least one of the parties into a better position. A rational person will avoid completing a deal if it puts him or her into a worse position. This concept is called Pareto-superiority. Ultimately, these transactions will lead to wealth maximization and a state of Pareto-optimality; a state where no further improvements are possible.

Problems with Law as Efficiency

This theory makes a few basic assumptions about the world and human existence that are problematic:

Humans as Rational Actors

Liberal market economics are inherently motivated by greed; an inner desire to improve one's well-being. The main issue with this theory is that it bases its arguments on an unrealistic perception of human nature. Primarily, the problem is that individuals are not all rational actors. Humans act on impulses, emotions and desires that stem out of a number of different motivations other than reason. Sometimes we act out of fear, love or external pressures that are outside of our control. Subsequently, laws may not necessarily evolve out of reason but out of a variety of different factors.

World of Perfect Information

Following the Coase Theorem, in order to create and sustain laws that are efficient, society must exist in a world of perfect information. In these ideal conditions, people are always going to make the most efficient decisions. The problem is that the Coase Theorem describes a world that doesn exist. Imperfect information and fraud are a real part of our existence. These lead to inefficient outcomes and distorted wealth allocations.

Market Externalities

Externalities are positive and negative effects that result out of transactions and are borne by third parties. Some may be beneficial to society. For example, two parties may contract to create erect a statute or build a park that can be enjoyed by the public. However, most externalities are negative because a rational person will never choose to pay for something that decreases their wealth. A rational individual will avoid a negative externality or will try to pass it on to someone else.

The Kaldor-Hicks test presents a more favourable outcome. Under this theory, a party to a transaction will receive enough wealth in order to use that wealth to outweight the negative externality. This model encourages the betterment of all members in society.

Application to B.M. v. British Columbia

The decision in this case is inefficient because it bears great negative externalities. The goal of tort law is to shift the harm from the plaintiff to the defendant in order to increase deterrence and prevent similar situations in the future. In the absence of deterrence, the defendant's actions will be left unaddressed and society may suffer from similar conduct in the future.

In order to be truly efficient and meet the Kaldor-Hicks test, the police ought to internalize the cost of the police officer's negligent behaviour. Establishing the causation in this case would enable the court to effectively shift the cost that society suffered.