This chapter introduces the reader to the basic concepts of law and economics, including the distinction between positive and normative analysis, the justification for using efficiency as a norm for evaluating law, the specific notion of efficiency that will be used throughout the book (namely, Kaldor Hicks efficiency), and the Coase Theorem. The chapter also gives an overview of the legal system in the United States.

This chapter develops the economic model of tort law, called the "model of precaution." The model is based on the proposition that the rules of tort law are designed to give parties engaged in risky activities an incentive to undertake all cost-justified precautions. The analysis compares the principal liability rules—strict liability and negligence—with respect to this objective and argues that, as regards cost minimization, negligence is the superior rule. The chapter then examines the famous Hand rule, the legal test for negligence, in light of the economic analysis. Finally, the chapter examines various extensions of the basic model, including variations on the simple negligence rule, sequential accidents, the role of causation rules, the function of punitive damages, the judgment proof problem, and the impact of liability insurance, litigation costs, and legal error on the functioning of the tort system.

This chapter applies the economic model of tort law to the following specific areas: products liability, workplace accidents, environmental accidents, and medical malpractice. In addition to reviewing the specific doctrines that apply to each area, the analysis raises an important new conceptual issue—namely, the difference between accidents involving "strangers" and accidents involving parties already in a contractual relationship. This distinction has important implications for the optimal design of the law, and for the relationship between markets and legal rules in allocating responsibility for legal wrongs. This is a theme that runs throughout the book.

This chapter is the first of two on the economics of contract law, which is the legal means by which people enforce promises that they make to one another. This chapter focuses on the question of what makes a valid contract. From an economic perspective, the answer is based on the objective of maximizing the gains from trade, and so the guiding principles are the defining features of a competitive market. The specific focus is on how the law deals with departures from those ideal features in actual contract settings. In particular, it answers the question: when can a party get out of his or her obligation to perform as specified in the contract? Several justifications can be advanced: mental incapacity or incompetence, coercion or duress, mistake about a material aspect of the contract, and gross unfairness in the terms of the contract (unconscionability).

This chapter examines the second fundamental question of contract law— what should the remedy be when a party breaks an enforceable contract? The chapter first describes the conditions under which breach of contract may be efficient, and then shows that expectation damages achieves this outcome. However, it also induces excessive reliance on performance by promisees. This problem is corrected by limiting to the amount that promisor's could have reasonably foreseen. The chapter then turns to risk-sharing considerations in contract law, as embodied in the doctrine of impossibility and related excuses. The discussion then considers the specific performance remedy, which is an order by the court for the promisor to perform the contract as written, and an argument is made for wider use of this remedy. The last section of the chapter discusses self-enforcement of contracts, including liquidated damage clauses, product warranties, long term contracts, and vertical integration.

The first part of this chapter describes the nature and function of property rights, how rights are defined, how they emerge, how they are legally protected, and how they influence economic behavior. The analysis then turns to a discussion of how the rules of property law facilitate the consensual exchange of property, and concludes with a brief overview of the economics of intellectual property law. The defining feature of ideas as economic assets is that they have public good attributes, meaning that once produced, they can be profitably used by many people without diminishing their quantity or quality. This characteristic suggests that ideas should be widely shared, but public ownership of ideas potentially creates a trade-off between wide dissemination of ideas, and the need to encourage people to discover or create them in the first place.

This chapter examines the role of property law in correcting market failure, or externalities. It begins by reviewing the economic theory of externalities and various mechanisms for internalizing them, including the Pigovian approach and the Coasian critique of that approach. The chapter also introduces the distinction between property rules and liability rules, and applies the analysis to trespass and nuisance law, as well as other responses to externalities. Other topics include various forms of non-consensual transfer of property rights, or limitations on such transfers. Subsequent sections turn to transactions between the government and private property owners, including eminent domain, and the related issue of regulatory takings. The chapter concludes with a discussion of the General Transaction Structure, which is a general framework for understanding the relationship between markets and the law.

This chapter provides an introduction to the economic analysis of crime and law enforcement. It begins by asking why there is a separate category of harms called crimes that are treated differently from accidental harms. The remainder of the chapter reviews the economic model of crime as it has developed since the seminal paper by Gary Becker. The theory is based on two principles: first, that offenders are rational calculators who take account of the expected punishment costs when making their crime choices, and second, that society chooses the structure of criminal penalties to minimize the overall costs of crime. Specific topics include the choice between fines and imprisonment, the impact of the magnitude versus the probability of punishment, the optimal treatment of repeat offenders, the death penalty, the ongoing controversy over the link between guns and crime, free speech laws, and blackmail.

This chapter undertakes an analysis of legal procedure, both civil and criminal. The discussion of civil procedure focuses on the settlement-trial decision, and also examines various procedural rules, including the burden of proof, pre-trial discovery, and the allocating of trial costs. It also examines the lawmaking function of trials. The discussion of criminal procedure emphasizes the practice of plea bargaining, which is the criminal counterpart to out-of-court settlements. Although many of the same considerations apply, plea bargaining raises concerns not generally present in the civil context, notably the question of whether it induces innocent defendants to plead guilty. The chapter examines several other aspects of criminal procedure, including the bail system and judicial discretion in sentencing, and concludes with a discussion of constitutional protections against self-incrimination and unreasonable searches and seizures.

This chapter examines the economic justification for antitrust laws, which constitute the body of statutes and judicial rulings whose objective is to prevent anticompetitive business practices. The competitive market paradigm provides the benchmark for efficient markets, but the conditions for perfect competition are rarely if ever met in practice. When significant departures arise, whether through the efforts of a single firm or a group of firms acting in concert, the resulting misallocation of resources may justify government intervention. The chapter offers an overview of some of the key issues related to antitrust law, beginning with the Sherman Act. The discussion focuses on the manner of enforcement and available remedies. The chapter concludes by examining the "new" economics of antitrust, which interprets many business practice once thought to be anti-competitive as possibly being responses some form of market failure.