Course:Law3020/2014WT1/Group D/Law As Efficiency
Economic efficiency uses “efficiency” as the justification toward legal rules. The purpose is to maximize the total wealth of all individuals (p.117). Contrary to theories such as Paternalism or the Harm Principle, economic efficiency does not justify law using morality, but rather, justifies that if a law is efficient, then such is sufficient for the law to be in place. Efficiency is measured as the social wealth of all, rather than the efficiency of an individual. Thus, it is possible for an individual to have a decrease in wealth, while society increases in wealth. Such is still considered “efficient” since the total social wealth increased, despite an individual losing wealth.
This is the ideal state of affairs in which one party is better off, but no one is worse off . This standard is evaluated in comparison with other parties. Thus, in economic efficiency, the standard is relative to other individuals. In a given transaction, if there is an overall gain, then the transaction will be efficient, despite possibilities such as the land being sold at a lesser price than possible, or if a party over-paid for a good.
In the legal context, a law can work to compensate the loser. Such will be justified if the overall transaction is still "efficient." Examples of such include government reimbursement of children's health and wellness activities and reimbursement for the purchase of solar energy panels.
In the commercial setting, reimbursement of travel expense is an illustration of such, since the corporation receives a net gain through the benefits derived from the work of their employees, which outweigh the cost of travel. In other words, under pareto superiority, the state of affairs would be such that no one is worse off despite externalities of cost,
This test recognizes that in some transactions, there will be a party that gains a benefit, while the other party might suffer a lost. Under this test, a transaction is "efficient" if the overall benefit outweighs the cost. In other words, if the winner's gain is large enough to compensate for the loss of the loser (including external costs), then the transaction is still deemed to be "efficient." The Kaldor-Hicks Test compliments Pareto Superiority by recognizing that there are situations where the other party would lose, but that such would still render the transaction efficient if the loser can be compensated, to make the overall transaction efficient.
Applications of the Kaldor-Hicks Test is seen in both Tort Law and Contract Law. The purpose of Torts is to compensate the Plaintiff where they have suffered a loss that would not have occurred "but for" the actions of the Defendant. In this manner, Torts compensate the loser (Plaintiff). In such scenario, the compensation would be efficient if the Defendant still maintains a net gain after compensating the Defendant.
Similarly, in Contracts, parties enter into agreements for an exchange. Rationally, parties enter into agreements to receive a benefit, while the freedom of contracts allow parties to mitigate and compensate for losses by addressing them as terms of the contract. Alternatively, contract law also addresses breaches and compensation in terms of loss of profits, loss of capital, damages, and punitive damages in some cases.
The concept that in the presence of externalities, if there are no strategic distortion of cost, and the parties are perfectly informed in their decision-making, then the parties will rationally make efficient transactions. This illustrates that in an ideal situation, rational parties will always work toward efficiency.
However, in reality, other factors such as the circumstances of the party, market forecast, and irregularities in cost, affect the decision making of the party. In a stock market, for example, a party might sell the stock at a loss, to prevent an even greater loss. Thus, externalities cannot simply be seen as static factors; rather, they are very pertinent considerations that affect the pursuit of efficiency in a party's decision.
Case Study: Eldridge v B.C.
If the theory was to be applied to Eldridge, the outcome would be consistent with that of the Supreme Court of Canada – no violation of s.15(1): Equality. Medical and Health Care Services Act creates an overall increase in social wealth that outweighs potential decrease of wealth suffered by the individual plaintiffs.
Medical and Health Care Services Act creates an increase in social wealth through distributing limited resources in the most efficient method possible. The Medical Services Plan pays for the provision of medical services by medical and health care practitioners on a fee for service basis. Not all medical services are covered. The allocation of funding is based on two factors: the annual budget dedicated to the Plan, and the allocation of such funds toward certain medical services.
The plaintiffs argue that the allocation is discriminatory since interpreters are not covered under the plan. Weighing the lost and gains of the plan though, economic efficiency is better served in the allocation of the funds toward more essential services. Note that there is a limited amount of money each year dedicated to compensate medical services used by individuals. If money is to be allocated to fund interpreters, then money will have to be taken away from other medical service to compensate. Weighing which two services to fund, the Commissioner has made the decision to fund services that are necessarily to the majority of society. Services that benefit a smaller group of society, such as clinical psychologists or occupational therapists, are not covered, and services that benefit many but not the majority of society are only partially covered. In effect, the plan maximizes the efficiency of the limited budget by using it in a manner that will benefit most members of society. As such, this plan is consistent with the theory of economic theory.
Even if the budgetary allocation is discriminatory, the plaintiffs do not “lose” or are at a “disadvantage” as a result. Translators are not provided to the plaintiffs, but neither are they provided to other members of society. The analogy can be made in that the plaintiffs greatly valued and wanted to buy apples, but the seller cannot come to an agreement to give the apples to plaintiffs. The plaintiffs and the seller are at the same position they are if the attempt to exchange had not taken place. Viewed as such, the plan does not decrease the wealth of the plaintiffs.
It can be argued that the plaintiffs had a “loss of opportunity” or a “real loss” since instead of providing the plaintiffs with a gain, other individuals benefit more from the Plan. However, despite such, there is still an overall increase of social wealth, therefore, the Plan is consistent with the core values of economic efficiency.