GOKHLE EDUCATION SOCIETY

NB THAKUR,LAW COLLEGE
NASHIK
SUBJECT NAME: B.A. 0403
Law and Economics
(BA LLB-IIND, SEM.-IV)

Name of the Teacher Objectives:

Astt. Prof. 1. To study the relationship between
Ravindra Pandit Adhav Law and Economics
93256-56797 2. To know the significance of
Economics in Law
3. To Understand the impact of
Economics on Law
Meaning of Law
 Meaning of Economics
Economics is a social science that studies how society uses its limited resources. It focuses on
the production, distribution, and consumption of goods and services.

Economics is concerned with the creation,

consumption, and transfer of wealth. It includes
the study of microeconomics, which explores how
people and firms produce and consume goods and
services. It also includes the study of
macroeconomics, which explores mass economic
progress and inter-country trade.
 Interrelationship between Law and Economics
Law and economics are closely related fields. The law and economics movement
suggests that law is a social tool that promotes economic efficiency. Economics can
also help judges and other officials evaluate how laws affect important social values.

Law and economics are

linked by concepts like:
❏ Custom
❏ Futurity
❏ Sovereignty
❏ Scarcity
❏ Property
❏ Contracts.
Law and Economy individually have immense importance in the development of a Nation. They
are studied together to get an Analysis on law which impacts the economy of a nation. India is a
diverse country with people being engaged in different kind of occupation.

To manage the citizens and their work as well as their contribution to the economy, Indian
Legislature has passed numerous laws related to it. Every year, Ministry of Finance pass Budget
to execute more beneficial laws for the country.

Historical Background

Bentham may have begun the field of Economic analysis of law as it was observed that his
writings contains analysis of property law and a treatment of legal process, but his work was
undeveloped by the four major contributors in the period of 1960s and early 1970s.
Benefits of Economic analysis of How do laws and legal systems affect
Law: economic development:
● Better Knowledge of Human Law has two roles to play in order to
behaviours bring economic development in a country
➔ First is the allocative dimension,
● Regulation of some bodies needs through which the law determines
a better understanding of what resources are to be placed
Economics where, where the resources would
come from, what they would be
● To understand Tax Laws
used for etc.
● Critical Examination on Law ➔ Next is the procedural dimension,
making which determines how efficient the
● To Conserve limited resources legal enforcement is, and whether
institutions of law are working in
● Understanding Property, coherence with the objective to
Consumer Protection and achieve economic growth and
Company Law development.
 The Rule of Law and Economic Development
Challenges to the rule of law
Here are some key insights into the
relationship between the rule of law
and economic development:

➢ The rule of law fosters trust and

confidence.
➢ The rule of law promotes innovation &
entrepreneurship.
➢ The rule of law reduces corruption.
➢ The rule of law can help to mitigate
economic crises.
 The success of interdisciplinary subject of law and economics has been
attributed to the strength of economics in providing a sound behavioral theory.

According to Holmes,’’ for the rational study of the law the black-letter man maybe the
man of the present, but the man of the future is the man of statistics and the master of
economics.’’
➔ Law is necessary to maintain the socio-economic equilibrium in the society.
➔ To know the effects of law on social goals, law markets must have a method
of evaluating the impact of law on social values.
➔ Economic does not predict the impact of law but merely describes and
explains it with an economic angle.
 Origin and development law and economics
The origins of law and economics can be traced back to late 19th century continental Europe.

★ Law and economics, or economic analysis of law, is the application of microeconomic theory to the
analysis of law.
★ The field emerged in the United States in the early 1960s.
★ The economic analysis of law, or law and economics, may
be defined as ‘the application of economic theory and
econometric methods to examine the formation, structure,
processes and impact of law and legal institutions’.

Modern law and economics dates from about 1960, when

Ronald Coase (who later received a Nobel Prize) published “The
Problem of Social Cost.
➢ The law and economics movement applies economic theory and method to the practice
of law.
➢ It asserts that the tools of economic reasoning offer the best possibility for justified and
consistent legal practice.
➢ It is arguably one of the dominant theories of jurisprudence..
➢ It also considers how legislation should be used to improve market conditions in return.
➢ Law and economics offers a framework with which to model legal outcomes, and
common objectives with which to unify disparate areas of legal activity.
➢ The bringing together of legal theory and economic reasoning has also created new research
agendas in the fields of behavioral economics: how rationality affects people’s behavior
within legal scenarios.
Role of law and legal systems in economic development of India

In the case of India, the relationship between the law and legal systems, and the economic development
can be drawn on two broad claims.

❖ The first claim is that 'law' determines the access of a firm to its finances and its ability to raise
capital for its working.
❖ The second that the legal system and legal origins of a country play a great role in determining the
flexibility of a country to change, to adopt and evolve its rules and regulations.
❖ As there is a direct correlation between
the efficiency of the legal system to protect
the investors and the development of the
external finance market, the laws revolving
around the protection of equity investors has
exponentially increased in India.
India is a country which has been undergoing constant economic development (in terms of Gross
Domestic Product), and has witnessed fairly high growth rates in the past decade or so (figure 1).
Research has shown that this high growth has been sustained by investment; typically a growth rate of
8% must be complemented by an investment effort in excess of 35% of GDP.

➢ Investment and equity finance is given weightage in determining the economic development of a
country primarily because it creates demand, introduces new technology, increases productivity,
generates employment opportunities, and creates capacity.
➢ Therefore, it is important to note that when we analyse the impact of laws and legal systems on the
economic development in India, an analysis of the impact on investment policies would be a
sufficient link between the two.
➢ India's post-independence laws were extremely weak and ineffective, disabling the growth of
industries. For example, the Companies Act 1956 lacked provisions allowing firms to continue
trade during corporate restructures and renegotiations.
 What Is the Economic Analysis of Law?

Consider a legal example. Suppose that a manufacturer

knows that his product will sometimes injure
consumers. How safe will he make the product? For a
profit maximizing firm, the answer depends upon three
costs: First, the cost of making the product safer, which
depends on its design and manufacture; second, the
manufacturer’s legal liability for injuries to consumers;
and third, the extent to which injuries discourage
consumers from buying the product. The
profit-maximizing firm will adjust safety until the cost
of additional safety equals the benefit from reduced
liability and higher consumer demand for the good
Economic analysis of law, also known as law and economics, is the
application of microeconomic theory to the analysis of law.

Focuses on how law and legal

rules affect the following:
● The behavior of individuals and
firms
● The allocation of risk across
individuals
● The distribution of resources in
society
Economic analysis of law involves two elements:
➔ Prediction of behavior in response to legal rules
➔ Evaluation of outcomes in relation to well-articulated measures of social welfare.

The field emerged in the United States during the early 1960s, primarily from the work of scholars
from the Chicago school of economics.

Economic analysis of law has many practical applications, such as:

● Helping with the drafting of laws

● Assessing the amount of damages required to return a person to the level of welfare enjoyed before an
accident occurred
❖ Sustainable poverty reduction and equitable economic
development depends upon the solid foundation of the
rule of law.
❖ Economic Analysis of law is an interdisciplinary subject
that brings two fields of study.
❖ Areas as contract, tort and criminal law are all based upon
economic aims.
❖ For example: the assumption that animals are deterred by
the threat of punishment only if the likelihood of
punishment multiplied by the quantity of punishment
exceeds the gain offered by the specific criminal act.
Why Lawyers should study Economics

Economics is important for

lawyers because every law has
economic effects. Economics
can help lawyers understand the
design of the legal system,
predict the practical implications
of legal changes, and find
potential improvements to the
law.
 Benefits of studying Economics to Law Students

First, knowing some economics should enable students to understand more fully the issues
encountered in a variety of areas of the law.

★ The economic approach to common law, for example, provides a consistent system for analyzing
cases and questions in a variety of common law areas by assuming that what matters in deciding
any case is giving parties involved·

★ Applying the economic approach gives students both an organizing framework for case analysis
and a normative framework for favoring one decision rule over others. Of course the economic
approach may not be the best one to use in all situations. But if an economically inefficient
decision rule is favored over an alternative rule which is more efficient, the economic approach is
nonetheless extremely useful in making clear the costs of taking an inefficient approach.
Second, in a variety of areas of the law, economic analysis constitutes
a central component of the legal arguments made in prosecuting and
defending the case.
★ Economic experts are usually brought in to make or buttress the
arguments, but the lawyers involved in such cases need some
knowledge of economics in order to understand the issues raised
by the expert and to use them effectively.
★ Economic arguments are often central to antitrust and price-fixing
cases, to employment discrimination cases, wrongful death,
injury, and tax cases. This list is obviously not all-inclusive and,
in addition, the trend over time has been for economic arguments
to be used and accepted in an increasing variety of cases.
Third,
★ many law students will become involved in
policy-making, whether because they end up working in
the executive branch of government or because they
become legislators, lobbyists, or legislative staff.
★ If so, then they will find themselves constantly mired in
economic issues, because virtually everything the
government does costs money-its own or someone
else's-and resources are always scarce.