Economic Approach of Law : Jurisprudence

Economic approach of law is the analysis of law from economic perspective. Economic approach of law and legal approach of economics are interrelated concepts. 

1. Law Facilitates Economic Efficiency

Law and economics are generally used as tools for encouraging economically efficient social relations.

The most central assumption in economics is that human beings are rational maximizers of their individual satisfactions, and, in turn, respond to incentives. A rational maximizer of personal satisfaction adjusts means to ends in the most efficient way possible.

Law helps and devices ways to help prevent situations that lead to market failure. For example, law can be used as a tool to ensure that monopoly situations are hard to bring about and maintain.

2. Current Developments

The economic analysis of law has given impetus to a number of further tools that are helpful in understanding legal institutions. Three of the most important of these are the results of behavioral economics, game theory and public choice theory.

a. Behavioral Economics and Law

Practitioners of behavioral law and economics examine human limits to means-end rationality. One of the outcomes of behavioral economics is the concept of bounded rationality. 

b. Game Theory

Game theory adds to economic modeling the phenomenon of strategic action. Strategic actions are those adopted because of the competitive nature of many social transactions. They are adopted due to how one individual expects another to act in response. 

c. Public Choice Theory

Public choice theory is centered upon how the nature of the legislative process and collective decision making influence the nature of law. It is the application of economic models of decision-making and their results to the issues that traditionally occupy political science, for example Arrow’s Theorem.