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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 2: The Foundation: A New Measure for Economic Efficiency

Richard O. Zerbe Jr.


2. The foundation: A new measure for economic efficiency 2.1 WHY A NEW MEASURE IS NEEDED In Chapter 1, I suggested that criticisms of normative economic analysis have eroded its use and particularly its moral authority. In this chapter I offer a set of seven axioms to address these shortcomings, based on considerations of usefulness and acceptance, on which a new normative criteria can rest. These axioms are then the social welfare function promised in Chapter 1. 2.2 CRITERIA FOR A NEW MEASURE OF EFFICIENCY Sen (1995, p. 11) notes that it is difficult to agree upon a rule for measuring social welfare because of the disparate considerations that pull us in different directions when we attempt to evaluate policies or welfare procedures. The goal I set for myself here is ambitious; it is to suggest a set of principles and accompanying procedures which will provide an ethical basis for benefit– cost analysis.1 The failure of ‘the New Welfare Economics noted in Chapter 1 was guaranteed, as its objective was the unattainable one of a value-free measure’ (Chipman and Moore 1978, p. 581). Both the undesirability and impossibility of such value-free measures are now well recognized (ibid.; Sen 1995; Hammond 1985). Criteria that are used to determine what is ‘good,’ or ‘better,’ or ‘best’ must encompass a definition of ‘good,’ or ‘better,’ or ‘best.’ Determining what is ‘good’ cannot, by definition, be a value-free process. Who would wish it to be...

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