Econ 522 – Lecture 23 (December 4 2008)One thing I forgot last lecture. I mentioned the debate over whether rich and poor should face different sentences for similar crimes. In the U.S., this is not generally done – some crimes are punished by a choice of a fine or jail time, but fines and jail sentences, at least in theory, are not differentiated according to the criminal’s wealth.In Europe, fines are more common for minor criminal offenses, and they are higher for the rich than for the poor. Specifically, day fines are commonly used – that is, rather thana fine being for a certain amount of money, it is specified as a certain number of days’ salary – so that rich people do face a greater penalty.Looking back over the semester…- We started out by introducing the notion of efficiency, or Kaldor-Hicks efficiency,or wealth maximization, and argued that it’s a pretty good goal for the legal system to aim for- With property law, the Coase conjecture suggested that if there are no transaction costs, efficiency is easy to achieve – just define property rights, choose any initial allocation of rights, and allow people to bargain with each other- (When there are transaction costs, we’re left with a choice: design the law to minimize transaction costs, or design the law to allocate rights efficiently as often as possible.)- But setting up and enforcing a system of property rights costs something, so efficiency demands only doing this when the gain outweighs the cost – we saw this with Demsetz- With contract law, we looked for rules that would yield efficient breach, and efficient reliance, and efficient disclosure of information, among other things- With tort law, we looked for rules that would create incentives for efficient precaution to prevent accidents, and efficient levels of risky activities- And in the last few lectures, with both civil and criminal law, we discussed designing the legal system more generally to minimize the combined cost of implementing the system and living with its errors – which is the same as maximizing the resources left to society- So with each branch of the law, the question we’ve asked is, what would an efficient system look like, and how do the actual rules in place measure up to the standard of efficiency?Now that we’ve made it through all that, it seems like a good idea to look again at efficiency, and return to two key questions:- is efficiency the right goal for the law?- and should we expect the common law system to naturally tend toward efficiency?To answer the first question, we started with Posner- Posner points out that the appeal of a Pareto-improvement is that everyone would consent to it- He tries to make an analogous argument for Kaldor-Hicks improvements, or changes that increase overall efficiency- Obviously, you can’t do this after the fact: once I’ve hit you with my car, I’d prefer a negligence system (or a system of no liability), and you’d prefer a strict liability system- But Posner introduces the idea of ex-ante compensation- He points out: “if you buy a lottery ticket and lose the lottery, then… you have consented to the loss”- And similarly: “Suppose some entrepreneur loses money because a competitor develops a superior product. Since the return to entrepreneurial activity will include a premium to cover the risk of losses due to competition, the entrepreneur is compensated for those losses ex ante.”- Suppose we all agree that a negligence rule is most efficient than a strict liability rule- And suppose for simplicity that everybody in society is the same – everyone is thesame age, is equally good drivers, drives the same amount, and so on- If I just hit you with my car, you’d prefer a strict liability rule- But if we all got together before any accidents happened and chose a system, we’d both agree to the negligence rule- If you wanted to be compensated if you ever got hit by a car, you could buy accident insurance – which, if a negligence system really is more efficient, would be cheaper than your expected liability would be under a different system- So Posner’s idea: we were all compensated ex-ante for the choice of the more efficient system. (If the system is negligence rather than strict liability, then liability insurance is cheaper.)- And therefore, it’s as if we all consented to it- Obviously, if people are different – some people don’t drive, but still get hit by cars – the argument is harder, but he tries to make it more general- Suppose we introduced a law that was inefficient, but favored tenants over landlords- We might think that tenants would like it and landlords would not- But since rental rates are determined competitively, it would probably just result in higher rents, to compensate landlords for the change in the law- So Posner’s general argument: if we could all meet up to choose a rule ahead of time, we’d all choose the efficient one- So assume that we all consented to it, and go with it- (He points out this is like the principle in contract law, where to deal with an unforeseen contingency, you try to impute the terms the parties would have chosen, if they had addressed that scenario in the contract.)- So that’s Posner on why the law should aim for efficiency- Cooter and Ulen take on the question as well, and offer another reason why the law should aim for efficiency- They acknowledge that society may have goals other than efficiency – in particular, a society may care about the distribution of wealth, not just maximizing the total amount of it- But, they argue, if society wants achieve redistribution, it is better to design the law to be efficient, and use the tax system to control distribution- They give several reasons for why the tax system is a better way to redistribute wealth than the legal system:o The tax system can directly target people with high or low incomes, rather than relying on rough proxies (like “consumers” and “investors”, or “doctors” and “patients”)o Effects of changes in the legal system are harder to predict than changes intax rateso Lawyers are more expensive than accountants (or really, transaction costs are higher when redistribution is through the legal system)o A law aimed at redistribution would function like a tax on a particular activity; but the more narrow a tax is, the more distortion it causes, and therefore the more deadweight loss it createsSo that gives us two views for why we
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