Edited by William F. Shughart II and Laura Razzolini
Chapter 26: Law and economics
Bruce L. Benson* 1 Introduction David Friedman (1987, p. 173) explains that ‘the economic analysis of law involves three distinct but related enterprises’: (i) prediction of the effects of legal rules, (ii) determination of the efﬁciency of legal rules, usually in order to recommend what the rules ought to be, and (iii) prediction of what the legal rules will be. He suggests further that ‘the ﬁrst is primarily an application of price theory, the second of welfare economics and the third of public choice’ (ibid.). This appears to be an accurate characterization of most of the law and economics literature, but all three areas of research actually require public choice analysis if predictions are going to be accurate and recommendations based on efﬁciency objectives have any chance of conforming with reality. For instance, one effect of rules that constrain behavior or impose costs on individuals is that those individuals have incentives either to change the rules or to break them. Efforts to change the rules obviously can involve public choice processes, and incentives to violate them mean that they will have to be enforced, perhaps by some bureaucratic agency, another focus of public choice analysis. Similarly, consideration of the efﬁciency implications of rules clearly should include recognition of the opportunity costs that arise in attempting to enforce them as well as the costs that people incur as they try to change the rules, prevent such changes, or both. In this regard, Lon Fuller (1964, p. 106) de...
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