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

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Law and Economics

The central claim of law and economics is that law serves the goal of economic efficiency. This provides that the best explanation of why we have rules is that they are efficient, and that we ought to have efficient rules as they are good rules.

Under this theory, efficiency means wealth maximizing. However, wealth maximizing is not to be taken in its colloquial sense referring to financial gain. Law and economics requires that social wealth be maximized as well, and that wealth maximizing is not solely concerned with money. This efficiency is best achieved where resources are allocated and distributed to the people who value them most. Efficient legal rules, therefore, serve to bring about efficient allocations of resources. Law and economics holds that the price of something is either its price in money, or money-equivalents.

Awkward Fit

Although law and economics claims to apply fairly universally, there is an awkward fit when addressing areas such as constitutional law. With the focus being on efficiency, law and economics can ignore scenarios in which morality plays a greater role. The theory tries to justify that morality is a consequence of efficiency, and that may be applicable to areas such as contract law, tort law, property law, and sometimes criminal law. However, in cases involving constitutional law, efficiency is not usually the sought after result and more emphasis is placed on morality, particularly not infringing upon morality through a person’s or society’s rights. This is made very apparent in the case of A.C. v. Manitoba (Director of Child and Family Services). Cases of this type cannot strive to meet or achieve an efficient outcome. It is up to the court to determine if the statutes created by the legislatures maintain or prevent efficiency. If the statute is inefficient, it is at the judge’s discretion to determine if the law should be struck or not.

Broader Application

In law, there will always be some winners and some losers. Due to this circumstance, achieving Pareto-Superiority is unlikely, as it requires an outcome in which there is at least one winner, and absolutely no losers. To achieve Pareto Optimality, may be possible, as the gains just need to outweigh the losses. However, Pareto-Optimal moves are not always utility increasing, as they are moves away from the state, and there are usually many optimal states available which cannot be compared economically to each other. To overcome this problem, law and economics suggests that it is possible to reach Pareto-Optimality through Pareto-Superior moves. However, due to the fact that there almost always winners and losers in law, this application will not work.

To overcome the problem with Pareto-Superiority, economists devised the Kaldor-Hicks test. Under the Kaldor-Hicks test, gains that outweigh the losses in a transaction are permitted, so long as the party that gains fully compensates the loss or losing parties. This will allow the move to increase overall wealth. However, a key part of the test is that the compensation is only potential, and does not actually have to be paid.

The Coase Theorem can also be particularly helpful in its application to law. Under the Coase Theorem, an optimal state is where transaction costs are kept to a minimum and individuals will bargain privately so as to achieve optimality. In this scenario, the law would not need to assign rights as everyone would have perfect information to allow for efficient results. However, where this is not the case, law and economics believes that law should play a role in assigning rights in such a way as to imitate the market and achieve efficiency.

In regards to the creation of laws, law and economics theorists believe that legislators almost never satisfy the Pareto principles, as they are motivated in maximizing their self-interest in seeking re-election. This self-interest will then lead politicians to offer influence to interest groups who will in exchange provide votes and financial support for these politicians. This redistribution is analogous to a Pareto-Optimal state which may not necessarily advance utility. There is no requirement that this redistribution be efficient, nor that it maintain or correct markets for their failure, and thus there is no guarantee that legislation aimed at redistribution will be efficient, or utility increasing. Thus, economic analysis is typically taken to apply only to branches of the common law and not legislative law.

Judges, while not having redistributive powers, can help achieve efficiency. They often face disputes, which arise from market failures. Therefore their decisions can directly correct or maintain the market. If cases are decided inefficiently, in that one party is burdened with unnecessary costs, they can always be appealed. Furthermore, precedent and the doctrine of stare decisis can help guide and create efficient outcomes, which supplement the legislation.

Application to A.C. v Manitoba

In this case, A.C. would be considered a rational person. This is reaffirmed by the cognitive testing she underwent, where the results demonstrated that she had the requisite capacity to make her own decision regarding whether she should proceed with the surgery or not.

If it is assumed that the legislature was acting in a manner as to maximize efficiency regarding the cognitive ability and understanding of a child under 16, the Kaldor-Hicks test could help justify the impugned provisions. The Act seeks to provide a rule where society can be assured that children, as a vulnerable group who sometimes lack the requisite capacity for certain serious decisions, will have their best interests protected. Therefore, the law and economics approach would affirm this approach by the legislature as the overall gains from it (protecting the vulnerability of children without a requisite capacity to make a life-altering decision) will outweigh the losses, which would be A.C.’s scenario (a mature minor, who although has the capacity to make her own decision, is to abide by the legislation). Compensation should be awarded to A.C., but the Kaldor-Hicks test holds that compensation need only be potential. Thus, the legislation conforms with the law and economics approach given by the Kaldor-Hicks test.

Furthermore, setting the age of 16 was not be an arbitrary number as determined by the legislature, but rather an age after which, most commonly, children were less dependent on their parents. Setting this age creates an efficient standard. To try each case or issue involving a child would become arduous and tedious for the courts, and would bottleneck the judicial process. This may seem unfair, but this unfairness is countered by the additional part of the provision which allows a mature minor with requisite capacity to make a decision. This also counteracts any complaints about the age of 16 being an arbitrary one. Thus, there are circumstances in which a child under 16 may still be permitted to make their own decisions regarding medical procedures.

The Coase Theorem further reaffirms this. If all children under the age of 16 could make informed decisions, without the need of intervention from parents, medical professionals, lawyers and judges, the Child and Family Services Act would not be necessary. However, children under the age of 16, in many cases, do not have the requisite capacity to make an informed decision. Furthermore, the parents of a child, or other professional adults may significantly affect the decision of the child such that the decision to forego or have a medical procedure will not be in the child’s best interests.

Lastly the court and judges have upheld the law. LeBel and the majority found that the legislation was not violating of a minor younger than 16 years old. The legislation seeks to protect children from physical harm. As law and economic theorists believe that judges can help achieve efficiency, they would most likely agree with the Supreme Court’s decision in this case. The majority, in their decision, upheld the efficiency behind the legislative purpose. Courts have the option of determining whether their actions should maintain or correct the market. By choosing not to strike down the legislation, the majority must have believed that the current statutory scheme was maximizing efficiency, and thus they sought to uphold it. If they did not think so, they could have invalidated the impugned provisions, or altered the market to strive for efficiency.

Concerns Going Forward Although the belief that judges can maintain efficiency can be correct, there are issues with it especially regarding the higher courts in the Canadian system such as the provincial appellate courts, and the Supreme Court. Law and economic theory holds that where a decision is inefficient it can be appealed. However, once a case reaches the Supreme Court, there is no higher authority to appeal to. Thus, if the Supreme Court made a decision which was inefficient, or did not maximize efficiency, it would undermine this premise. Furthermore, since the Supreme Court is the highest judicial court, its decisions would govern over all lower courts, thus impairing efficiency.

A second concern is in regards to where there is more than one justice sitting on the bench of the court. Where the court is not unanimous, and dissents arise, this shows that a majority decision may not achieve efficiency. If the decision was efficient, then the court would be unanimous. Thus decisions with dissents may take the law back to a position of Pareto-Optimality, where there may be many results which are optimal, but do not increase utility.