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

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The Theory

In analyzing economic theory, we see that law as efficiency, describing how legal rules work, and why laws develop in the way they do (in order to be efficient). This is true even where there are claims that laws are adopted for other reasons. The Normative theory is also analyzed, where good legal rules are efficient rules. As efficiency is such a major topic in this theory, it must be further analyzed what efficiency is defined as.

Adam Smith

When defining efficiency in economic theory, one must look at what maximizes social wealth the most. A transaction is deemed efficient if the result is a net increase in wealth maximization. Wealth does not only refer to money- but to measurable satisfactions. This model relies on human behavior, as individuals should make decisions that are to be in their best interest; thus providing reasons for transactions which would lead to greater wealth maximiaztion. The purpose of the law should be to maximize this social wealth. This is done through the use of law, which will be used to facilitate and achieve said objectives.

Pareto Superiority

When looking at economic theory; the idea of pareto superiority also arises. With this concept, it is when there is at least one winner and no loser. It can be achieved through a win-win transaction, or in a win-lose transaction where the winner fully compensates the loser for her loss, but still comes out ahead. A free market transaction by rational persons will always be pareto-superior. A rational man will not choose loss for which he is not compensated.

Kaldor-Hicks Test

The Kaldor-Hicks test is used to determine if a transaction is efficient. In order for a transaction to be efficient the overall benefit must outweigh the cost to one's neighbours. IF the gains to the winner are large enough where they could further compensate the loser and factor in third party costs, and still remain profitable, then the transaction is deemed to be efficient. If the party was not able to remain profitable after compensating the other party then the transaction would not be efficient. Law can work to require compensation for losers of transactions, and this can be done through the creation and assignment of property rights as well as regulations.

Property Rights

The objective of property law, and property rights in general, is not to produce economic equality. Rather, the objective is to protect entitlements and insure the efficient use and transfer of property. This is why the law has actions such as injunctions and damages, to protect a property owner from interference, intrusion, and reduction of value in their property.

Tort Law

In Tort Law, the wrongdoer may have to compensate the person that harm was done to, by restoring them to the position they would have been in had no harm been committed. This has the effect of inclining people in the position of wrongdoers (defendants) to take care and aim to prevent future losses, by attempting to be efficient in their activities. When they are efficient in their activities, and minimize risk in doing so, the chance of being sued in tort law and thus compensating individuals would decrease. The key factor here is the risk element. It must be determined when an activity is too risky, as this would increase the potential liability.

Contract Law

Economic efficiency is promoted through contract law. A framework is created for efficient exchange, and a contract facilitates trust and confidence thereby encouraging trade amongst strangers. There are standards which reduce transaction costs, and rules encourage use of formal contracts which are detailed providing for contingencies. The notion of the remedy of damages is also significant as it is there for the point of not continuing a relationship if it is no longer efficient. The concept of restitituo in integrum is relevant, where it restores the party to where they would have been if the contract had been performed.

Criminal Law

Criminal Law may also be understood in economic terms. Law and economic theory analyzes the question of efficiency in criminal law. This looks at the sanctions as a means of achieving the desired end, and whether investment in the public criminal system is less then the wealth created by the non protection of valued interests. The social cost of criminal behaviour must be looked at in order to determine if there are more efficient alternatives then criminalization.


To summarize, economic theory is governed by the idea of efficiency. The claim is that many legal rules become developed due to it’s ability to increase social wealth. The theory analyzes how the legal system is used in order to achieve a net increase in social wealth. In order for this theory to be analyzed, there is the belief that individuals are society are rational beings who make their decisions with their self-improvement in mind. This is a liberalist position based on John Stuart Mill’s viewings. Judicial decisions can be framed in the ideas that the rulings are made in order to increase efficiency in the marketplace. The court can either increase or decrease the social wealth with these rulings. The judiciary is a critical role in that they can ensure that costs and incentives are there to regulate behaviour to society, thus people may not proceed down non-efficient paths. This is in contrast to what would likely be viewed of the legislature; which is involving maximizing self-interest to ensure the continuity of their political career rather then achieving efficient results.


When analyzing economic theory, the focus is clearly on the maximization of wealth. The wealth must not be monetary in nature, and thus the issue of social maximization of wealth is relevant. In this case, this was clearly the nature of the court’s decision. The court notes that in p. 137, the goal of the CDSA is “the maintenance and promotion of public health and safety”. This law has a clear goal of social maximization by maintaining the purpose of these goals. The court also specifically notes that by the Minister not allowing the exemption to be granted to Insite, the actions are grossly disproportionate. They analyzed this through a social aspect, saying

“It is also grossly disproportionate: the potential denial of health services and the correlative increase in the risk of death and disease to injection drug users outweigh any benefit that might be derived from maintaining an absolute prohibition on possession of illegal drugs on Insite’s premises.”

This clearly shows the courts position on this issue. There is a clear social benefit from allowing Insite to operate. The societal impacts are not minimal in nature, they have a clear purpose and they are effective. The court ruled an exemption as the Charter breach could not be justified under section 1. The legal system is clearly used to increase net social wealth. The judiciary was framing the issue in terms of how it would impact society with the Section 7 charter breach.


The Supreme Court of Canada clearly had the perspective of increasing social benefit, and the evidence is strong. The denial of health services would be a negative to society, and thus decrease social wealth. The result of the verdict was that Insite would be granted an exemption by the Minister, thus increasing the social wealth.

Navigate to Other Legal Theories

Theory Philosopher
Natural Law Thomas Aquinas
Positivism John Austin
Separation Thesis Example
System of Rights Ronald Dworkin
Liberty & Paternalism Example
Law As Efficiency Adam Smith
Feminist Jurisprudence Example