This blog post examines the desirability of legal systems from a law and economics perspective, using efficiency and equity as criteria.
To discuss which legal system is socially desirable, we first need criteria for judging desirability. Law and economics uses efficiency as its yardstick. Efficiency refers to whether the total welfare of society increases, where welfare means the subjective pleasure or satisfaction gained as a result of an action.
Efficiency can be divided into ex post efficiency and ex ante efficiency. Ex post efficiency means achieving maximum output at minimum cost under the current given circumstances, while ex ante efficiency is a concept that considers the ex ante incentives of the parties involved. Let’s take theft as an example. In a society consisting only of A and B, B steals and uses A’s property without any permission. One might think that since the property has merely transferred from A to B, the total welfare of society has not changed, but this is not actually the case. This is because the welfare of A and B regarding that item may differ. If A’s welfare is 100 won and B’s welfare is 80 won, society as a whole experiences a 20 won decrease in welfare. This is precisely why the law prohibits theft from the ex post efficiency perspective. The problem with theft can also be explained from the ex ante efficiency perspective. If theft were legally permitted, the following points could be predicted: First, Party B’s incentive to work would decline. This is because they could obtain necessary goods without working. From Party A’s perspective, they would incur costs to prevent theft. This decline in work incentive and the expenditure on theft prevention do not contribute to an increase in social welfare. In other words, from a pre-factual efficiency perspective, permitting theft creates an incentive that reduces social welfare.
Furthermore, to assess the efficiency of a legal system, the concept of equity must also be considered. Equity is the standard for judging whether the distribution of resources among members of society is fair. If a legal system is designed considering only efficiency, it can lead to unequal distribution of resources; therefore, equity must also be considered. For example, in the case of social welfare systems, if only efficiency is pursued, cost reduction could become the top priority. However, this can disadvantage the socially vulnerable, so equity must be considered to ensure appropriate support is provided.
Bankruptcy law is a prime example of a legal system formed from the perspective of ex post efficiency. When a debtor’s assets are insufficient to repay debts and bankruptcy proceedings commence, all individual debt collection is prohibited, and creditors can only receive repayment within the bankruptcy proceedings. If individual debt collection were permitted, everyone would attempt to collect first. This process could damage the debtor’s assets or lead to their sale at bargain prices, reducing overall social welfare. Bankruptcy law exists to prevent such inefficiency, enabling more efficient management and distribution of the debtor’s assets.
Legal systems can also be established based on ex ante efficiency. According to intellectual property laws, plagiarizing or unauthorized use of novels or songs is prohibited. However, even if something is copied, the original does not disappear, and if the cost of copying is very low, increasing copies could be seen as increasing social welfare. Yet, if intellectual property rights are not recognized for creative works, the incentive for creation diminishes, potentially preventing creation from occurring in the first place. Therefore, intellectual property laws grant creators exclusive rights to enhance ex ante efficiency.
Furthermore, environmental protection laws are also a good example of ex ante efficiency. In the short term, relaxing environmental pollution regulations could reduce corporate production costs and stimulate the economy. However, in the long term, environmental destruction is likely to decrease overall social welfare. Thus, environmental protection laws can be considered necessary regulations to enhance ex ante efficiency from a long-term perspective.
Thus, when judging the desirability of legal systems, both efficiency and equity must be considered. Efficiency aims to increase the size of total social welfare, while equity seeks to realize social justice through the fair distribution of resources. Through this, legal systems can progress in a socially desirable direction.
