Human nature leads us to reject what we do not know. So, to avoid falling victim to this natural tendency, let us explain before getting into the subject matter, and let us do so in the simplest way possible: with an example.

Rules guide our behavior

Let’s imagine that the law tells us that regardless of the behavior of the driver of a vehicle or a pedestrian, responsibility for traffic accidents will always fall on the driver. As a result of this rule, we will have reckless pedestrians and drivers who are afraid to even start their vehicles. However, if the law tells us the opposite—that the pedestrian will always be responsible—there is a possibility that there will be more traffic accidents or that pedestrians will be forced to take extreme safety measures, including not leaving their homes. It should be clarified that we are not considering here that drivers might feel some kind of remorse for physically harming another person.

Appropriate incentives, efficient behavior

Obviously, neither of the two laws proposed balances the level of caution that should be exercised by drivers and pedestrians. The ideal solution here would be a rule where both drivers and pedestrians are simultaneously motivated to take the necessary precautions without incurring disproportionate costs. Let’s call this motivation “incentives,” and let’s call taking necessary measures without incurring excessive or disproportionate costs “efficiency.” The law must therefore create the appropriate incentives for individuals (or the market) to act in the most efficient manner. Why efficiently? Because we have limited resources (time, money, natural resources, etc.), and efficiency is nothing more than obtaining the desired result—in this case, a certain behavior on the part of citizens—using as few resources as possible.

Law and economics

Thus, economic analysis of law (law and economics) studies how rules create negative or positive incentives that modify or reinforce the behavior of individuals, the market, and/or the state; and likewise, it attempts to tell us how rules should be drafted, how contracts should be structured, and how the government should act so that each of these legal situations achieves the desired results (effectiveness) using the least amount of resources possible (efficiency).

Therefore, although we may initially view law and economics as separate sciences, we should give ourselves the opportunity to observe how they work together and, above all, take advantage of the benefits that may arise from this relationship.

Food for thought

I leave you with the following thought: Is a fine of $5,000.00 for talking on a cell phone while driving the best (most efficient) way to deal with this problem? Here’s a hint: The problem is not that people use cell phones while driving, but rather the number of traffic accidents this causes. So, I repeat the question for reflection, now rephrased: Is a fine of $5,000 the most efficient way to prevent traffic accidents in your city ? For your answer, I suggest you consider, among other things, the costs of enforcing the rule (agents who will supervise, implement, and collect the fine, etc.), as well as the likelihood that the rule will actually be enforced and the fine collected in the event of a violation. A little economic analysis of the problem and the rule can bring us closer to the solution.