Course:Law3020/2014WT1/Group O/Law and Economics

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Law and Economics

Law and Economics serves the goal of economic efficiency and is seen as a tool for wealth maximization in society. There are three central claims within Law and Economics.

  1. Descriptive: Some legal rules are efficient. Scope is different between economic analysts. Some believe specific branches of law are efficient, such as torts. Some believe the wider category of common law is efficient. Others hold that all branches of law are efficient
  2. Explanatory: The best explanation of why we have the rules we do it that they are efficient. It is their efficiency explains why we have the rules we do. This is a difficult claim to prove because the laws may be efficient but that may not be why the rules were actually adopted. Efficiency could be a by-product of justice, fairness, or utility. Positive argument for this claim is that judges and law makers desire to adopt efficient rules, but they use their reasoning to outline their motivating reasons for adopting certain rules and not other.
  3. Normative: We ought to have efficient rules. Insofar as the rules we have promote efficiency. They are thereby normatively justified. Efficient rules are good rules, and efficiency is a normative value that ought to be promoted by law.

In the context of this theory, efficiency equals the social wealth maximizing outcome. Wealth is not only measured in monetary values. Wealth is measured by including all the tangible and intangible goods and services traded in a market. The market value for such goods is determined by either the asking price or offer price they have in the market. Theorists argue that the law cannot be properly understood unless it is seen as an institution that has its point as the maximization of wealth. This is said to lead to a normatively attractive goal. Transactions are seen to be pareto-superior and pareto-optimal. Prareto-superiority occurs when one social state is seen when at least one person is better off in the new state and no one prefers the first state to the new state. Pareto-optimal is just the social state that there is no longer any transactions that could be pareto-superior. Transactions are pareto-superior if they are win –win , or of the winner fully compensate the loser and still comes out ahead. There can be many optimal states and they can be reached without using superior transactions. One main theorist for the Law and Economics is Richard A Posner. Posner’s take includes the rational man theory. Everyman is presumed to be rational and therefore voluntary market transactions will always be pareto-superior. The Coase theorem furthers this thought. When looking at costless transactions and individuals acting co-operatively the initial assignment of rights will be efficient. Law’s rule is to mimic the market and assign rights to achieve efficiency. Law can alter the activities’ price, which then alters the level of activity. Posner’s theory presumes that legislators cannot and do not pursue efficiency in the economic sense. Most legislative action is a form of redistribution and if they are to help to relieve market failures they will be efficient. However there are no requirements that redistribution must be efficient meaning mostly economic analysis to common law not statutory law. Judges influence can be seen in the common law. Under Posner’s theory, inefficient decisions should compile most of the appeals brought to court. Appeals become a method courts use to replace inefficient decisions with efficient decisions. Efficiency is reinforced through the law systems use of stare decisis.

Application to the Case

Alberta v. Elder Advocates of Alberta Society (Elder Advocates) deals with legislation that allows Alberta to charge patients to offset the costs of LTCFs. In the reasoning of the case, the court decides on several claims that include:

  1. Fiduciary Duty
  2. Negligence
  3. Bad Faith
  4. Unjust Enrichment
  5. Section 15(1) Claim of Discrimination

Fiduciary Duty

The claimants were unable to show the 3 factors needed to establish that there was a fiduciary duty. The theory of Law and Economics allows judges to change decisions to allow more efficient laws. The decision to not allow a fiduciary duty to senior citizens allows the judges to dissect a piece of legislation and determine whether the results are efficient. In this case, the court decided to not impose a duty on the province when it came to the senior citizens. This decision allows the province to continue to partake in market transactions without having to do so without the worry of the best interest of another. The claimants wanted the fiduciary duty so the Province was responsible for the setting of accommodation fees. This is a legislative action and legislative actors are not though to act efficiently. The holding in this issue therefore follows the theory of Law and Economics.


Again the claimants are worried about a legislative factor. The courts find that this is not the Province’s duty because of what is placed in the statute. When dealing with social wealth and a large state actor like a Province it makes sense efficiency wise to not impose a duty onto the Province for every group of citizens that could make a claim. This would cause an increase need in funds and therefore the Province would have to get the additional funds from society as a whole, decreasing the social wealth in the transaction.

Bad Faith

The courts explain how there is not a separate claim for bad faith without negligence. Having two separate claims with varying standards to meet would place restrictions on society. Co-operative transactions would be scrutinized by both parties due to the threat of legal action. The courts decided to apply the current law and not allow another claim that could be a drain on the court system. This drain would again lead to the need for more funds and therefore, leave society at a inferior social state.

Unjust Enrichment

This claim is where the court is able to take a transaction that led to one party being unfairly extorted and apply a remedy of compensation to create an equal transaction. Efficiency is based on creating a social state where one person at least is better off and where nobody is worse off. This decision follows the theory of Law and Economics and its ability to create fair transactions that are presented to the public as a decision based on what is just.

Section 15(1) Claim of Discrimination

The courts protect the senior citizens rights to equality and allow the claim and class action law suit based on ones s.15(1) rights to equality. Even in Law and Economics it is important for the courts to protect the basic rights of society. By providing evidence that the courts will uphold the rights of such groups, like the senior citizens in this case, it shows society that the courts work to stop transactions that only help to advance one group at the expense of others. Such transactions are only optimal for very few individuals so the overall social wealth is harmed. Allowing these kinds of transactions would cause more and more parties to try and advance their social wealth while harming others. This is one way the court can create incentives to increase the market activity by creating a healthy transaction environment. The healthier the market environment is, then the more transactions that will take place.


The courts balanced the decisions to help reinforce individual rights, while not enforcing duties on the Province and not creating more standards. This balance may not be seen as the most just decision because of the fact the Province was infringing on the rights of a minority group. However, Law and Economics would see this decision as being efficient as it works to increase the social wealth of society as a whole. Protecting the market transactions and individual rights to promote an increase in pareto-superior transactions and building towards a pareto-optimal social state. Law and economics doesn’t mesh well with other theories. It doesn’t look at laws coming from a higher power, it does not take into account morality and it doesn’t impose any requirements other than efficiency. All decisions are and laws are said to be to increase the total social wealth of a system.

Links to further treatments of the case:

Legal Perspectives Philosophers
Natural Law Thomas Aquinas
Legal Positivism John Austin, HLA Hart, Jeremy Bentham, and Joseph Raz
Separation Theory HLA Hart and Ron Fuller
System of Rights Ronald Dworkin
Liberty and Paternalism John Stuart Mill and Gerald Dworkin
Law and Economics Susan Dimock
Feminist Jurisprudence Patricia Smith and Catharine Mackinnon