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Law and Economics

Economics is the most advanced of the social sciences, and the legal system contains many parallels to
and overlaps with, the systems that economics have studied successfully. Judge Richard A. Posner
Economics provides a normative standard for evaluating law and policy. Lawss are instruments for
achieving social goals, and economics predicts the effects of policies on efficiency.
Changing the legal relations governing society and or its working rules will ultimately and systematically
affect economic outcome.
Game theory
-economics has provided a mathematically precise scientific theory to predict the effects of legal
sanctions on behavior.
-surpasses intuition, just as science surpasses common sense
Coase Theorem (1960)
-consider a factory whose smoke causes damage to the laundry hung outdoors by 5 residents. In the
absence of any corrective action, each resident suffers $75 in damages, or a total of $375.
-2 ways to solve- $150 smokescreen installed and $250 for buying each Laundry dryer.
Role of the Government
-Government intervention is seen in periods marked by highly intrusive laws.
-Other periods are of laissez-faire, with the government playing a passive role. (Laziness of government
passing corporations to private entities)
-You must have a raw data to decide a situation.
According to proponents
-common law legal rules are, in fact, efficient.
-Legal rules ought to be efficient.
-Legal processes select for efficient rules.
-Individuals respond to legal rules economically.
-Common law doctrines promote efficiency.
Sole Proprietorship vs. Corporation
-The corporation allows individuals an alter-ego to suit their business interests.
Sole Prop
As DAs
Sole Control Limited Life Difficult to raise funds because you only have you
Ease of set-up Unlimited liability Difficult in transferring ownership

As DAs
Unlimited Life Many regulations
Limited Liability difficulty in settings
Ease of raising funds
Easy in transferring ownership