Economic Efficiency in Law and Economics

Economic Efficiency in Law and Economics

New Horizons in Law and Economics series

Richard O. Zerbe Jr.

In this path-breaking book, Richard Zerbe introduces a new way to think about the concept of economic efficiency that is both consistent with its historical derivation and more useful than concepts currently used. He establishes an expanded version of Kaldor–Hicks efficiency as an axiomatic system that performs the following tasks: the new approach obviates certain technical and ethical criticisms that have been made of economic efficiency; it answers critics of efficiency; it allows an expanded range for efficiency analysis; it establishes the conditions under which economists can reasonably say that some state of the world is inefficient. He then applies the new analysis to a number of hard and fascinating cases, including the economics of duelling, cannibalism and rape. He develops a new theory of common law efficiency and indicates the circumstances under which the common law will be inefficient.

Chapter 6: The Problem of Missing Values in Normative Law and Economic Analysis

Richard O. Zerbe Jr.


6.1 INTRODUCTION I have suggested, as a matter of logic and consistency, that all goods must be included in a welfare analysis for which there is a WTP or WTA. The acceptance of axiom 5 – which deals with missing values – would improve the consistency and logic of benefit–cost analysis. It vitiates the most widespread and persistent criticism of normative economic analysis. That criticism is that, even in principle, benefit–cost analysis ignores certain values (Anderson 1993; pp. 194f; Kelman 1981; and Sagoff 1988). Here, the term ‘missing values’ refers to goods ignored in normative evaluation.1 I propose to show that missing values are not missing in principle, but have been overlooked in practice. That is, they may be missing from the analyst’s discussion or from the critics critique, but are not missing, in principle, as a logical part of benefit–cost analysis, and, by definition, are not missing in KHZ analysis. Sometimes the missing-values criticism is made explicitly, as when Kelman (1981) and Williams (Smart and Williams 1973, pp. 97–98) complain about the neglect of the value of integrity, or of moral positions, by normative economic analysis. Other complaints focus on undesirable results from normative economic analysis (Parfit 1992). These usually turn out to be, at root, implicit complaints about missing values.2 For example, some complain about the reduced weight given to future generations as a result of the discounting process in benefit–cost calculations, and conclude that the foundations of analysis...

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