basically it tells the relationship of economic with law

8. Interactional Dimensions of Law & Economics Thus, economics is concerned with efficiency, i.e., rational allocation of resources with least cost and maximum satisfaction. Law is concerned with justice only and not about its cost. Hence, in case there is a conflict between efficiency and justice, economic analysis can be used to provide information on the costs of justice. There is another angle to justice here, i.e., the resources if not utilized properly or are being misused or wasted, it is considered as immoral and good law can prevent this to achieve efficiency and justice. Economics, in itself, may not be able to give precise answers, but it can draw attention to some important questions. In many countries, the cost-benefit analysis is been used by law reform bodies and Governments to help in the development of more cost.-effective laws. For instance, the economic approach to tax avoidance and tax evasion provides an insight into its side effects.

9. Interactional Dimensions of Law & Economics When a productive activity is undertaken, the total cost involved in it is constituted of both private and social cost. Private cost is that part of total cost which is borne by the individuals. Social cost is the cost which the society bears on account of the productive activity being undertaken. For example, the basic costs like cost of inputs, i.e. raw materials; wages, rent etc. are met by the manufacturer and are a part of private cost. But when productive activity is undertaken, the society will also bear its cost in the form of pollution to the environment and this cost is called social cost. All this creates an inefficient production pattern.

10. Interactional Dimensions of Law & Economics Generally, legal economists are concerned with social costs and transaction costs as these divert the resources to unproductive purposes. The unnecessary costs resulting thereof also imply denial of justice to certain sections of the society. Thus, we can say that “justice is not independent of its cost”. For instance, if civil law remedies are to be effective, it has to be cheap, otherwise transaction costs, i.e., the costs of retaining legal advisors, cost of bargaining etc. maybe very high. Ronald Coase in his Paper in 1961 suggested that the institution of legal liability has better economic advantages than the earlier view of classical economists of imposing tax on each unit of output of the polluting firm equal in size to the damage generated.

11. Interactional Dimensions of Law & Economics The main thesis of Coase, known as Coase Theorem is, “A fundamental economic principle of liability is that where informed and costless bargaining is possible between the injurer and victim, the cost justified level of accidents will result without the need for judicial intervention. The gains from trade inherent in an inefficient level of safety will encourage the parties to voluntarily negotiate a mutually advantageous accident bargain that minimize their joint costs/losses…” Generally, it is observed that people do not respond positively to the law, nor mindlessly obey it, but they adopt to the changed costs and benefits of it. Depending on the costs incurred and the benefits to be obtained, the people decide to follow the formality of law or the informality of law.

12. Interactional Dimensions of Law & Economics Formality of Law: When people evaluate their relationship with formal activity, there are two things that they consider, viz, “cost of access”, and the “cost of staying in it”. The cost of access is the cost incurred at the time of entering into the economic activity, i.e. the requirements to start the enterprise. Due to the regulations of varying nature and importance, like compliance with bureaucratic procedures, obligations to administer personnel, payment of higher rates for public utilities etc., the person loses a lot of time and money in standing the enterprise. Besides, these costs, there are other costs of staying in the business, like taxes, insurity of property rights, inefficiencies in settling disputes or collecting debts etc.

13. Interactional Dimensions of Law & Economics Informality of Law (Illegality): Formality of law involves money, time and diversion of scarce resources to unproductive activities, people resort to informality, i.e., they do business illegally. This involves three types of costs, viz., “cost of avoiding penalties”, “cost of net transfers” and the “cost of evading certain taxes and labour laws”. When people do not obey laws, they constantly run the risk of being penalized for not having obtained permits, licenses, paid taxes etc. These save them from the legal costs of compliance but sometimes have to bear the penalties. If the informal costs are cheaper than the formal costs, then informal gain more.

14. Interactional Dimensions of Law & Economics Another point worth noting here is that, the informal businesses are generally undercapitalized. They cannot use much of the capital goods as it makes them easily detectable. The amount generally used by them comes from the unorganized sector, for instance from the moneylenders, who charge them a higher rate of interest due to lack of tangible security. Apart from this, they also incur costs of the inability to use the contract system. These informal lack the facilitative legal instruments, which makes them incur more costs.

16. Interactional Dimensions of Law & Economics Sometimes, the activities of the informal may even spread to the formal and ultimately it becomes costly for the general public. A good law helps to prevent the misuse of scarce resources in the society. It is not enough that good laws exist in the country, it is equally important that they are implemented fairly, promptly and flexibly. In India, this situation is quite disappointing as it results in minimum of benefits and maximum of costs. Due to this, the IMF, the World Bank and Multi-National Companies (MNCs) wanted the simplification of legal rules and judicial decisions regarding disputes to be quick, cheap and flexible. If the costs are reduced, it leads to increased profits which can be used for further growth of the business.

17. Interactional Dimensions of Law & Economics A point worth noting here is that one has to consider the estimated value and not actual value of the economic opportunity. In doing so, one has to take into account the cost of red-tape, the degree to which it can be protected against third party appropriation and the ease with which it can be sold. People would be able to identify and seize existing opportunities to increase the value of economic activity if the law dealing with these is efficient. Specialization and independence of the individuals and resources is also encouraged

18. Economic Analysis of Tort Law Tort Law is the name given to a body of law that creates and provides remedies for civil wrongs. Generally speaking, it defines what constitutes a legal injury and establishes the circumstances under which one person maybe held liable for another’s injury. Deliberate torts causing bodily harm, property harm etc. is ruled as crimes in the court system. For example, if X throws a ball and accidentally hits another person Y in the eye. Now Y may sue the ball thrower for losses occasioned by the accident like the cost of medical treatment or loss of income during the time he is off from work. In this case, whether Y will win or not will depend upon whether he can prove that X engaged in tortious conduct in injuring him. The main substance of tort law is determining the “standard of care”, i.e., distinguishing between when conduct is or is not tortious.

19. Economic Analysis of Tort Law Tort law may also be used to compensate injuries that are intangible, such as an interest in freedom from emotional distress, privacy interests and reputation. These are protected by a number of torts such as infliction, privary torts and defamation. For example, defamation and privacy torts may allow a celebrity to sue a newspaper for publishing an untrue and harmful statement about him. Economic torts are torts that provide the common law rules on liability for the infliction of economic loss, such as interference with economic or business relationships. These protect people from interference with their trade or business. The principal torts can be listed as passing off, injurious falsehood and trade libel, conspiracy, inducement of breach of contract, tortuous interference and watching and besetting.

21. Economic Analysis of Tort Law In the modern world, tort liability has been expanded to include intangibles, probabilistic connections and liability without fault. Before developing our economic analysis of tort law we need to make some assumptions. Firstly, in economic theory, we consider the “rational man”. It implies that a person, who takes reasonable care, is stable and tries to maximize his satisfaction. Here it also implies that he can calculate the cost and benefits of the alternatives available to him and can minimize his liability by taking precautionary actions. Secondly, we assume that there are no regulations designed to reduce external costs. If we compare liability regulation sometimes one is more efficient than the other and sometimes both together are more efficient than either one by itself. Regulation is ex-ante enforcement by administrators and liability is ex-post enforcement by victims.

22. Economic Analysis of Tort Law For instance, if a store is required to have a fire extinguisher, the inspectors will check it from time to time that the store complies with the regulation. But suppose, if the store complies with the regulation, and a fire injures a customer, then the store maybe held liable. In this case, the store is subject to regulation and liability. Thirdly, we assume that there is no insurance. Insurance transfers the risk from the insured party to the insurer, i.e., it externalizes . This gives the insured an incentive to reduce precaution, which is known as moral hazard. For example, a person who insures his bike against theft may not be so careful about locking it every time. Lawyers do not agree that insurance interferers with the goals of tort law but rather they favour insurance for accidents and liability. But there maybe some cases where this is not so, such as in case of punitive damages . Insurance allocates the cost of accidents according to private contracts and it also regulates.

23. Economic Analysis of Tort Law For instance, under fire regulations, the insured may be required to maintain sprinklers and submit to inspections. In this case, insurance privatizes liability and regulates precaution. A change in tort law may increase or decrease the costs of insurance against accidents and liability. Thus, tort law provides the restrictions within which the private insurers operate. Fourthly, it is assumed that all the injurers are solvent and pay the damages in full . Lastly, it is assumed that there are no litigation costs. But in real life, litigation is expensive and it has different effects on potential victims and potential injurers. For instance, it may induce the potential victims not to file actions or induce potential injurers to take more care.

28. Economic Analysis of Contract Law Contract Law helps the people to cooperate with each other by enforcing, interpreting and regulating promises. Contracts facilitate trade and economize the costs of making transactions. It lays out guidelines for information that must be revealed and that maybe kept secret in a contractual relationship.

30. Economic Analysis of Contract Law In real world people are not economically equal or equally knowledgeable. Thus, many times, contract between two unequal’s results in favour of economically stronger men. But in economics, we assume the people are economically equal and can trade with each other on equal footing. Contract Law regulates the terms and conditions of the contracts between people of different economic backgrounds. In Bombay Labour Union v. M/S. International Franchise (P) Ltd., the Supreme Court in India gave a blow to the so-called sanctity of contract. The Court observed , “It is too late in the day now to stress the absolute freedom of an employer to impose any condition, which he likes on labour. It is always open to industrial adjudication to consider the conditions of employment of labour and to vary them if it is found necessary, unless the employer can justify it by convincing reasons”.

31. Economic Analysis of Contract Law Obeying the legal rules and trying to cover all the issues arising from a contract would be time-consuming and expensive. Hence, the contracting parties have found certain ways to reduce the costs involved in forming contracting parties. These are: Normally, the contracting parties depend on the custom and trade practice to determine the profits and losses that may commonly result in their particular line of business; or Well-known principles can be relied upon by the contracting parties to find out the results of certain contingencies that are not itself covered by the contract; or Standard form of contracts maybe used by the contracting parties to help them to economize the costs, which can be used for many trading purposes, rather than having a custom-designed form for a single deal.

32. Economic Analysis of Contract Law The empirical investigations by the economists and legal economists came to the conclusion that resort to legal remedies by the parties to the contract is minimal due to heavy litigation costs or due to the reputation of a person in the trading community. For instance, if a person ‘X’ resorts to litigation with many of the contracting parties, he would be putting them to higher costs both in time and money. His own reputation that he is a litigant and a ‘court bird’, may isolate him from the trading community resulting in reduced contracts with others. Thus, if the contracting parties resolve their disputes by compromise, traditional business and morality points of view, then the mediation by the trading community will work efficiently and will also reduce the transaction costs to a large extent.

33. Economic Analysis of Contract Law However, these might fail as the markets expand and become complex. Sometimes, it may also be possible that a breach of contract is economically efficient. For example, ‘X’ contracts with ‘Y’, the seller, to buy a machine for Rs. 25000. Just before the delivery, the demand rises unexpectedly and the price of that machine increases. Another buyer ‘Z’ approaches ‘Y’ and offers to pay him Rs.35000 for the same machine. Due to the disequilibrium in the demand and supply, the market price of the machine is Rs.27000. Suppose, ‘X’ goes to the court for special performance or may compel “Y’ to pay him some profit that “Y’ would make from breaching the contract. ‘X’ may insist on receiving Rs.3000 from ‘Y’ as damages. If ‘Y’ agrees, ‘X’ can recover at Rs.27000 and be better off by Rs.2000, than he would have been under the damage remedy, which would have given him only the difference between the cover price and the contract price.

34. Economic Analysis of Contract Law Thus, wherever, seller’s better offer is higher than the new market price, the seller has an incentive to breach and the first buyer has an incentive to threaten specific performance to capture some of the sellers’ gains from the breach. Therefore, under economic analysis of contract law, we have to analyze the case laws from the economic efficiency point of view.

35. Economic Analysis of Consumer Protection Law Economic development of the countries over the period of time has resulted in the growth of monopolies, divergence between private and social goods, increase in advertisement expenditure resulting in imperfect competition etc. All these factors have resulted in the defects in the price mechanism. State intervention thus, becomes necessary. The government has to correct these imbalances in the economy by regulating the economic activities.

37. Economic Analysis of Consumer Protection Law The principle of caveat emptor, (let buyers’ beware), does not make much sense in the modern complex world where the information is not distributed freely. The buyer ends up being a loser and needs to be protected. If the sellers are put in positions where they become more open to court actions for negligence, defective or unsafe goods etc., they would then take steps to improve the quality or even withdraw from the markets. The spread of education, advertising media, rising prices, large variety of goods, the concept of social responsibilities of business etc. are responsible for growing consumer awareness. In some cases the consumers have formed associations to protect their rights against unfair trade practices.

38. Economic Analysis of Consumer Protection Law According to David Cravens and Gerald Hills, “consumerism is a social force within the environment designed to aid and protect the consumer by exerting legal, moral and economic pressure on business”. Businessmen exploit consumers by supplying poor quality of goods at higher prices or by adopting unfair trade practices such as adulteration, hoarding, black marketing etc. The government of India has taken several measures to promote a strong and broad based consumer movement in the country. Consumers’ organizations are provided financial assistance and various National Awards are instituted for the protection of consumers. The Consumers’ Welfare Funds Scheme, 1992 is meant to provide financial assistance to protect and promote the welfare of the consumers. It prepares and distributes audiovisual material on consumer affairs.

39. Economic Analysis of Consumer Protection Law The Consumer Protection Act, 1986, came into force on July 1, 1987. It aims to promote some basic rights of consumers and to set up quasi-judicial bodies for redressal of consumer disputes at the District, State and National levels. It provides enormous powers to consumers and consumer organizations against unscrupulous businessmen.

42. Economic Analysis of Consumer Protection Law The Consumer Protection Act has proved very helpful to consumers but the authorities suffer from shortage of funds, legal complications, bureaucratic procedures, delay in deciding the complaints etc. Sometimes false claims are lodged which waste a lot of time and energy. All these things result in economic inefficiencies, wastage of scarce resources, costly and time consuming litigation .