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

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Law and economics theorists believe that the greater the social wealth of a society the better. Accordingly, they argue that the purpose of law should be to maximize social wealth. Interestingly, wealth is not measured in terms of money alone. Social wealth includes anything and everything that has “value” which is measurable in some way. Unfortunately, there is no absolute way of measuring value; money does not apply to every situation. However, value can be measured quite efficiently in relation to other things of value. For example, Canadians value their right to liberty. However, they value the punishment of wrongdoing in the form of a crime more than the right to liberty and therefore we, as a society, allow the imprisonment of criminals. The maximization of wealth, understood in this sense, should be the goal and purpose of the law. Law as efficiency theory has both descriptive and prescriptive components. Some laws that we currently have can be shown to conform to the efficiency theory and their existence can be explained on the basis of efficiency. Prescriptively, efficiency theorists argue that all laws should be aimed at efficiency because they believe in the normativity of wealth maximization. Indeed, some laws exist for the sole purpose of increasing efficiency.

Efficient Allocation of Resources

The maximization of social wealth starts with efficient allocation of resources. Efficient allocation means that a resource should be given to the party that values it the most. Since everyone values their resource more than anyone would, we have the greatest social wealth. From that point onwards, social wealth can be increased by facilitating transactions between different parties that lead to a net increase in social wealth. There are two types of theoretical transactions that can lead to an increase in social wealth. It is worth noting that the law and economics theory has two basic assumptions.

First, the efficiency theorists believe that all parties involved in a transaction are rational parties that are acting in their self-interest in maximizing the value of their resources. Second, the efficiency theorists believe that people have all the information they need to make a transaction i.e. they do not take into account fraud, deceit or ignorance in their theory.

Two Types of Transactions

Nicholas Kaldor

A transaction is Pareto-Superior if both parties are benefitting from the transaction. For example, if X has a laptop that’s worth $100 and Y offers her $101 and they make the deal, X has a $101 cash and Y has a laptop that she values at $101. The total social wealth in this transaction increased from $201 to $202 and both parties benefitted. A transaction in which one party loses can still be Pareto- Superior if the winning party gains enough to offset the losing party’s loss and actually offsets it. However, Pareto-Superior transactions are rare in the real world.

A Pareto-Optimal state is achieved when there can be no Pareto-Superior moves made without making someone worse off. A Pareto-Optimal state is not necessarily the most ideal and desirable state of affairs. Although a Pareto-Optimal state achieved through Pareto-Superior moves only would be a desirable state of affairs. However, due to the virtual non-existence of Pareto-Superior moves, it is unlikely to happen.

Kaldor-Hicks test proposes a different measure of efficiency to remedy the defects of Pareto-Superiority. Kaldor-Hicks allows transactions in which a party loses as long as the winning party’s gains are sufficient to fully compensate the losers. However, the losers are not actually compensated but there is still an increase in the overall wealth.

Markets and the Law

Voluntary transactions tend to be Pareto-Superior because a rational person would not make a bad deal. Hence, the purpose of law is to facilitate markets where voluntary transactions take place as that would lead to a maximization of total wealth. However, even when a transaction is beneficial to both parties involved, it might have negative impacts on or costs to third parties (externalities). A very common example of such costs if environmental pollution. If a third party is being made worse off, then the appropriate standard to use is the Kaldor-Hicks standard to determine whether overall wealth is being maximized. At times, the law will be asked to allocate the costs of the externalities and it is expected to do that in the most economically efficient way possible. Another hurdle in the function of free markets is transaction costs. These are the costs that are incurred up to the point of making a transaction such as locating a potential buyer, taxes, etc. Transaction costs are seen as a hurdle to wealth maximization and therefore it should be the purpose of the law to minimize these costs.

Efficiency as Descriptive of Current Law

There are certain branches of law that can be explained on the basis of efficiency theory:

Tort Law: Tort law is compensatory by nature. It uses economic sanctions to command a reasonable behaviour from the citizens. A significant portion of the insurance industry is based on tort law principles; for example professional insurance for different professions such as doctors, lawyers, tradesmen, etc., automobile insurance, etc. It is arguable that professional insurance facilitates wealth maximization by allowing professionals to provide services without worrying about liability and allowing customers to purchase services with the assurance of compensation in cases of negligence. A fault based insurance system, one that is most popular, gives actors incentive to be careful while giving them liability protection.

Contract Law: Contract law deals primarily with commercial transactions by providing a fixed set of rules that will be applied in those transactions. It facilitates the market by encouraging reliance on strangers knowing that a breach of a promise will be actionable at law. Also, it reduces transaction costs by providing fixed rules that can be determinative of the outcome of a dispute if one was to arise.

Property Law: Property law allows people or parties to make transactions that are in their self-interest and increase the value of their assets by assuring people that their property will be protected by law. Individuals only like to do business in countries that have well established laws protecting private property because that is their motive behind participating in the market.

Criminal Law: Criminal law regulates the behaviour of citizens through the threat of loss of liberty. Even though the right to liberty is one of the most valued rights, society has determined that the cost of upholding the right to liberty absolutely is too high and that it can be taken away if certain behaviour is engaged in. Other aspects of criminal law are also based on economic efficiency, such as collective policing as opposed to private security, caps on spending in the criminal justice system, etc. Even though some aspects of the law can be explained on the basis of economic efficiency, there are others that cannot. For example, protection of minority rights enshrined in the Constitution. It costs the state a significant amount of money to uphold those rights from which only a small number of people benefit. They are in place because we have established that they are important for a fair and just society regardless of whether they make economic sense or not.

Should Efficiency be the Guiding Principle of Law?

Arguably, there are areas of law where adopting the efficiency principles makes sense. It is true that wealthier nations tend to have better citizens’ rights protections, standard of living, etc. However, it is naïve to believe that that is the sole result of principles of economic efficiency. An average American citizen has better standard of living because they can afford materials with the amount of money they make. That is only possible because those materials are produced in developing or third world countries by workers who have almost no rights for an amount of money that is often times not sufficient for the minimum standard of living that can be classified as decent. Current economic system does not function on the assumptions of honesty and good faith; the real world is plagued with evil and corruption. Economic efficiency can be a guiding principle of law if it genuinely maximizes social wealth for the globe and not just one country. The current model is very short of that and therefore safeguards are needed in the law to protect basic human dignities even if they don’t make economic sense.

Application to the Case

The issue before the court in this case was to allocate the decision making power on the withdrawal/continuation of life support of an incapable patient. The court had to decide whether to give the power to the Substitute Decision Maker (SDM) which is usually a family member or the doctors that are responsible for the patient’s care.

An efficiency theorist would make a decision on this case based on the most efficient outcome. What would make maximize social wealth? In a private setting, as long as the Mr. Rasouli’s family was paying for his treatment, the doctors would not seek to take him off life support because the next patient would be paying as much as Mr. Rasouli’s family and therefore the wealth would remain the same. However, the healthcare system in Ontario is publicly funded, which means that Mr. Rasouli’s family is not paying for it; neither would be the next patient. We are not dealing with efficiency in terms of money in this case then.

As noted above, money is not the only measure of social wealth. A person’s life has value as well and contributes to social wealth. The death of Mr. Rasouli would subtract from the total social wealth. However, that has to be juxtaposed against the potential lives that could be saved if Mr. Rasouli’s bed was available to other patients as the province only has a limited number of beds available. The court in this case did not make a decision based on Mr. Rasouli’s prognosis; it merely decided whether the consent of a SDM is required if a patient’s life support is to be withdrawn.

Economic efficiency theorists would not approve of a publicly funded healthcare system to begin with because it is not very efficient. However, Canada has made the decision that it values its citizens’ health more than the money it costs to provide for the system. This approach has its benefits as well as its drawbacks. The wait times for treatment are increasing as the state’s resources are being stretched to the maximum and that is affecting Canadians’ health and even leading to death in some cases.

The majority decision ruled that the Health Care Consent Act applied in end of life situations and that the SDM’s consent was required. In reaching this conclusion, the majority refers to the fact that “the HCCA has applied for the past 17 years and therefore should not be lightly discarded”. By concluding that a well established set of rules applies in this case, the court is introducing some certainty in the decision making process. Certainty of rules logically leads to reduced transaction costs because certainty produces predictability. Even though the SDM’s consent is required, the doctors have the option of appealing the SDM’s decision to the Consent and Capacity Board that can review the consent decision based on the guidelines set out in the act. Hence, even in situations of dispute, an efficient avenue for resolution is provided because quasi-judicial boards tend to be swifter than courts. Ultimately, the board’s decision is judicially reviewable as well but these reviews are normally restricted to procedural aspects only.

The dissent in this case, concluded that the HCCA did not apply and that the doctors had the unilateral power to decide whether to continue life support or not. The dissent also concluded that if the SDM disagreed with the doctors’ decision then it could apply to the court for a substantive review of their decision.

From an efficiency perspective, the majority’s decision seems efficient by reducing transaction costs in two ways: 1. giving the Board the power of substantive review because its generally faster and cheaper than going to court, and 2. introducing certainty by making well established rules applicable. That is the most efficient outcome that could come out of this situation. In the dissent’s decision, the power would be placed unilaterally in the doctor’s hand with the option for the SDM to challenge that decision in court. In general, boards are faster and quicker in resolving disputes due to their expertise in the area as compared to courts, a process that tends to take longer and is more expensive. Also, a substantive review of a doctor’s decision by a lower court also opens it up to review by the appellate court which is further time and money consuming. On the other hand, if the substantive review of a decision is reviewed by a board then typically a court can only review it for procedural fairness which makes the system faster and more efficient.

Taking the present case at hand, the patient has not improved significantly in three years and three different doctors are of the opinion that the chances of improvement are next to nothing and that treatment in fact might cause harm. It is a reasonable decision in the best interest of the patient and the public at large to withdraw the life support of Mr. Rasouli. From an economic efficiency point of view, the majority decision is preferable because it rests the substantive review power with the board that is likely to be more efficient and has limited scope of review by the courts. It thus improves efficiency by reducing the transaction costs to a minimum. In addition to that the external costs have to be taken into account as well. The external cost in this case is the denial of opportunity to other patients to get treatment with the resources that are being spent on Mr. Rasouli. In calculating the total cost of the treatment, an efficiency theorist would factor in all variables such as the prospects of Mr. Rasouli’s recovery, external cost that is being borne by society at large, the demand for the resources that are tied up with Mr. Rasouli to find out the best outcome according to an efficiency perspective.

In conclusion, the majority’s decision is the most efficient one and on a substantive level, taking into account all the factors, it is in the interest of maximizing social wealth that Mr. Rasouli’s life support should be withdrawn.