Economic Efficiency in Law and Economics
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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.
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Chapter 7: The Failure of Market Failure

Richard O. Zerbe Jr.

Extract

7. The failure of market failure 7.1 INTRODUCTION The failure to include transactions costs when considering whether a rule or practice is efficient is one of the most pernicious problems in economics. It has led to endless difficulties. This chapter delineates the role of transactions costs in considering efficiency. It shows that a proper consideration of transactions costs reveals the market failure approach – and the prescriptions for government intervention based upon it – to be incoherent. Axiom 7(a) states: ‘Transactions costs are to be included in evaluating an economic change or in determining economic efficiency.’ This simple axiom has powerful implications for the concept of market failure and the question of the proper role of government in the marketplace. This question is an old and fundamental one. Public officials throughout the world grapple with this issue, deciding which public services to provide or how to regulate the activities of individuals and firms, a task made more urgent by recent efforts to privatize public responsibilities and ‘reinvent’ government. In the search for objective standards by which such decisions can be made, public officials increasingly have turned to the concept of market failure. Use of the market failure concept is widespread, both in teaching curricula and in practicing government circles. This chapter demonstrates once again the limitations of the market failure concept. Its shortcomings have been known for some time, but with little consequence, since its use continues to be widespread. In this chapter I summarize...

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