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

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Law and Economics

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 Limitations Act establishes that once a certain period of time has passed a person is unable to pursue their claim. It would appear that the purpose would be protection of the defendant but ultimately efficiency within the legal system. Requiring claims to be made shortly after the occurrence of the wrongdoing, prevents the courts from having to deal with the consequences such as lost evidence or missing people that may result from time passing. In regards to costs, it would appear that older claims would create the potential for additional efforts and costs to track down parties, witnesses and old evidence.


Lon Fuller and other proponents of consistency between law and morality, would also support the Limitations Act's goals, but with more of an emphasis on the protection of defendents.The motivation to create a law that protects potential defendants appears to have a largely moral emphasis. The passage of time allows a plaintiff to build a stronger claim, while for the defendant it could mean a loss of evidence, and other crucial elements to their claim.


The enforcement of and support for the Protection of Children Act can clearly be understood in terms of the law and economic theory. The protection of children is an objective in society that the majority of society place a high degree of value on, and therefore are willing to spend money to promote and ensure.


The present case also deals with the principle of negligence and vicarious liability. The court found that the government did owe a duty of care to the appellant to ensure they were placed in a safe foster home. Further the court found that as a result of a breach of this duty, the appellants suffered “costs” i.e. physical and psychological trauma. According to the Law and Economics Theory such costs would be classified as externalities. Accordingly they would need to be internalized and therefore shifted back onto the government. However this evidently did not occur and no compensation was required by the courts. It would appear that the law and economics theory would believe that the courts made a rational human decision, which was chosen with the belief that barring the claimants action would maximizes social wealth and was more efficient than allowing their delayed claims to succeed.


The court also addressed the notion of vicarious liability between the government and the foster parents. According to Law and Economics Theory the majority was unable to establish a case of vicarious liability due to the fact that the government did not maintain enough control over the foster parents to prevent and control the risk that they were creating.


However in contrast the concurring judgment did find that there was a case of vicarious liability. In reference to the idea of control over creation of risk, Arbour J, found that the tortfeasors were acting on behalf of the government. They referenced the fact that while foster parents do control the organization and management of their household to the extent permitted by government standards, the government does indeed supervise via the social workers, and may interfere to a significant degree, precisely to ensure that the child’s needs are being met. Accordingly the policy goals that justify vicarious liability, namely compensation and deterrence of future harm, are served by finding vicarious liability in the present circumstances. It would appear to that the difference in opinion between the two sides of the court resulted from different ideas on the amount of control required to establish vicarious liability. It would appear difficult to determine which position the law and economics theory would side with, as the theory’s level of control required to make out a claim seems to be undecided.

It would appear that perhaps natural law, and law and economics would have similar reasonings behind their support for the judgment. While natural deals with achieving the common good, and law and economics seeks to achieve wealth maximization, it would appear that they both have efficiency within society as a goal. Specifically in this case, it would appear that both natural law and law and economics would argue that the decision was largely based on what the court found to be best for society. Law and economics also appears to have similarities to Hart's Separation Thesis. While on the surface the decision of the court to base their decision on efficiency appears to be legally driven, there are also elements of morality. Law and economics would argue that the decision to follow the Limitation Act was required for efficiency. However the theory would also find that the element of morality is present, otherwise externalities (in this case damages) would not have been considered. Lastly it would appear that the Law and Economics would not fall in line with Fuller's notion of morality. It would appear that law and economics would argue that the decision of the court was initially routed in efficiency and then morality stepped in to tie up any lose ends. Where as Fuller would argue that it is entirely morally based.