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

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Law as Efficiency is a normative legal theory founded on the belief that law serves to promote efficiency and wealth maximization in society. Unlike the 'Natural Law' perspective, 'Law as Efficiency' does not include morality in its foundation. Under this aspect, it is similar to 'Legal Positivism'; one may evaluate laws according to morality but they are not created because of it.

Essence of Law as Efficiency

At the heart of this theory is rational wealth maximization, as established in liberal market economics. Accordingly, a law is valuable if it creates efficient outcomes. Consequently, an application of law ought to place society into a better position. These improvements can be measured by an overall evaluation of society's satisfaction, including monetary fulfillment, as well as emotional and physical satisfaction.

This theory assumes that humans are inherently rational, making decisions logically and in their best interest. They are free actors, who are at liberty to pursue their well-being. Ultimately, this leads to an increasingly improved state of existence for everyone. Liberal transactions always position at least one of the parties into a better position. A rational person avoids completing a deal if it puts him or her into a worse position. This concept is called Pareto-superiority. Ultimately, these transactions lead to wealth maximization and a state of Pareto-optimality; a state where no further improvements are possible.

Problems with Law as Efficiency

This theory makes a few basic assumptions about the world and human existence that are problematic.

Humans as Rational Actors

Liberal market economics are inherently motivated by greed; an inner desire to improve one's well-being. The main issue with this theory is that it bases its arguments on an unrealistic perception of human nature. Primarily, the problem is that individuals are not all rational actors. Humans act on impulses, emotions, and desires stemming out of a number of different unreasonable motivations. Sometimes we act out of fear, love, or external pressures outside our control. Subsequently, laws may not necessarily evolve out of reason but out of a variety of different unreasonable factors.

World of Perfect Information

Following the Coase Theorem, in order to create and sustain efficient laws, society must exist in a world of perfect information. In these ideal conditions, people are always going to make the most efficient decisions. The problem is that the Coase Theorem describes a world that does not exist. Imperfect information and fraud are a real part of our existence. These lead to inefficient outcomes and distorted wealth allocations.

Market Externalities

Externalities are positive or negative effects resulting from transactions, borne by third parties. Some may be beneficial to society; two parties may contract to erect a statute or build a park that can be enjoyed by the public. However, most externalities are negative because a rational person will never choose to pay for something that decreases their wealth. A rational individual avoids a negative externality, or will try to pass it on to someone else.

The Kaldor-Hicks test presents a more favorable outcome. Under this theory, a party to a transaction will receive enough wealth in order to use that wealth to outweigh the negative externality. This model encourages the betterment of all members in society.

Application to B.M. v. British Columbia

The decision in this case is inefficient because it bears great negative externalities, and arrives at an incompetent outcome . The goal of tort law is to shift the harm from the plaintiff to the defendant in order to increase deterrence, preventing similar situations in the future. In the absence of deterrence, the defendant's actions are left unaddressed, and society may suffer from similar conduct in the future.

In order to be truly efficient and meet the Kaldor-Hicks test, the police ought to internalize the cost of the police officer's negligent behavior. The organization creating the inefficiency is the only one capable of controlling and minimizing it. The transaction in this case concerns society and the police force; it is decided upon by the courts. Establishing the causation would enable the court to effectively shift the cost that society suffered.

Under the court's decision, the police receives little to no benefit. Their only gain is the avoidance of punishment. Society, on the other hand incurs a great cost: the loss of trust and confidence in the police force. One could argue this mistrust, in turn, also creates a negative effect on the police force. Cooperation between the state and community is in their interest as much as society is interested in having an effective police force. Therefore, this decision arrives at a lose-lose judgment. Consequently, the law and courts hereby did not arrive at an efficient outcome.

A truly proficient court, aligned with the values of this legal theory, would have shifted the cost to the police. This would have led to the state of Pareto-superiority, namely a win-lose situation. The solidification of a police duty to provide greater assistance and protection of vulnerable community members is a positive gain to society. Although it results in a loss for the police, the overall wealth of the parties is maximized. In conclusion, the outcome in B.M. v. British Columbia is not aligned with the legal theory of 'Law as Efficiency'.