In this blog post, we examine the desirability of legal systems from the perspective of law and economics, using efficiency and equity as our 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; welfare refers to 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 takes into account the ex ante incentives of the parties involved. Let’s take theft as an example. In a society consisting only of Person A and Person B, Person B steals and uses Person A’s property without any permission. One might think that since the property has been transferred from Person A to Person B, the total social welfare has not changed, but this is not actually the case. This is because Person A and Person B may derive different levels of welfare from the same item. If Person A’s welfare is 100 won and Person B’s is 80 won, there is a 20-won decrease in total social welfare. This is precisely why the law prohibits theft from the perspective of ex post efficiency. The problem with theft can also be explained from the perspective of ex ante efficiency. If theft were legally permitted, the following outcomes could be predicted. First, Person B’s incentive to work would decline. This is because they could obtain necessary goods without working. From Person A’s perspective, they would incur costs to prevent theft. This decline in work incentives and the expenditure on theft prevention do not contribute to an increase in social welfare. In other words, from the perspective of ex ante efficiency, allowing theft creates incentives that reduce social welfare.
Furthermore, to assess the efficiency of a legal system, the concept of equity must also be considered. Equity serves as a standard for determining whether the distribution of resources among members of society is fair. Since designing a legal system based solely on efficiency could lead to unequal distribution of resources, equity must be taken into account as well. For example, in the case of social welfare systems, if efficiency is pursued in isolation, cost reduction might become the top priority. However, this could disadvantage the socially vulnerable, so equity must be considered to ensure appropriate support is provided.
A representative example of a legal system formed from the perspective of ex post efficiency is bankruptcy law. When bankruptcy proceedings begin because a debtor’s assets are insufficient to repay debts, all individual debt collection is prohibited, and creditors can only receive repayment within the bankruptcy proceedings. If individual debt collection were permitted, everyone would rush to collect their claims first. This process would result in a decrease in overall social welfare, such as the debtor’s assets being damaged or sold at a fraction of their value. Bankruptcy law exists to prevent such inefficiencies, enabling the debtor’s assets to be managed and distributed more efficiently.
There are also cases where legal systems are established based on the perspective of ex ante efficiency. Under intellectual property laws, plagiarizing or unauthorized use of novels or songs is prohibited. However, reproduction does not destroy the original, and if the cost of reproduction is very low, one could argue that social welfare increases as more copies are made. Yet, if intellectual property rights are not recognized in relation to creation, the incentive for parties to create diminishes, and creation may not occur in the first place. Therefore, intellectual property laws grant exclusive rights to creators to promote ex ante efficiency.
Furthermore, environmental protection laws are also a good example of ex ante efficiency. In the short term, relaxing environmental pollution regulations can reduce corporate production costs and stimulate the economy. However, in the long term, there is a high probability that social welfare will decrease due to environmental destruction. Therefore, environmental protection laws can be considered necessary regulations to enhance ex ante efficiency from a long-term perspective.
As such, when assessing the desirability of a legal system, both efficiency and equity must be considered. Efficiency aims to increase total social welfare, while equity seeks to realize social justice through the fair distribution of resources. Through this approach, legal systems can move in a socially desirable direction.
