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Economic Efficiency in Law and Economics

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.
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Chapter 1: History of the Concept of Economic Efficiency

Richard O. Zerbe Jr.


1. History of the concept of economic efficiency 1.1 INTRODUCTION James Buchanan won the Nobel Prize by proving that the process by which elected officials enact policy in a decentralized polity, such as the United States, leads to spending patterns that are inevitably inefficient. Ronald Coase won the prize for showing that traditional concepts of efficiency fail to account for costs that affect every trade and government action: the costs of transactions. Both Coase and Buchanan showed how institutional arrangements affect efficiency, and how changes in these arrangements can be either efficient or inefficient.1 If the concept of efficiency is to serve a useful role, it needs to rest on a firm foundation. To create such a foundation is the aim of this book. Practical people need practical measures of economic efficiency. Theorists want measures that are theoretically sound. Still others want measures that are ethically satisfying. No current measure of efficiency satisfies all of these requirements. The weight of moral and technical criticism promises to undermine the authority of the current efficiency criteria (Zerbe ‘Three Rules’ 1998b). Indeed, criticisms of legal and economic thinking about efficiency has reached the popular press (see, for example, Purdy 1988). The purpose of this book is to meet the critics’ challenges. Its purpose is not to argue, or to determine, whether or not their charges are true, but rather to provide a version of normative analysis, the foundation and use...

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