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Law and economics (or the economic analysis of law) is an approach to legal theory that applies methods of economics to law. It includes the use of economic concepts to explain the effects of laws, to assess which legal rules are economically efficient, and to predict which legal rules will be promulgated. On an equal[the same] footing, there is the famous case: United States v. Carroll Towing Co. 159 F.2d 169 (2d. Cir. 1947). It is a decision from the 2nd Circuit Court of Appeals that proposed a test to determine the standard of care for the tort of negligence. The judgment was written by Learned Hand wherein he described what is now called the calculus of negligence or the Hand Test, a classic example of a Balancing test. The aim of Tort Law is internalizing an externality. it means changing private costs (or benefits) so that they equal social costs (or benefits). ‘The Problem of Social Cost’ (1960) 3 Journal of Law and Economics 1, by Ronald Coase deals with economic problem of externalities. It draws from a number of English legal cases and statutes to illustrate Coase's belief that legal rules are only justified by reference to a cost benefit analysis. If there were no such things as the costs of doing a transaction, legal rules would be irrelevant to the maximization of production. But because in the real world there are costs of bargaining and information gathering, legal rules are justified by, and if they do in use, their ability to allocate rights to the most efficient right-bearer. We must the point of ‘Nash equilibrium’ for the Social Cost Minimization. It is keenly necessary to make complete internalization of externalities for ‘Nash equilibrium’. But incomplete internalization of externalities was caused by a enforcement error. It can be solved by the punitive damages and the complementary function of consolation money(Schmerzensgeld). The understanding of Law Economic Analysis of the Tort Law have as much trouble as representativeness heuristic and unrealistic effects. Put it in a nutshell, if we consider that the purpose of tort law is not only realization of ‘Social Justice’ but also accomplishing of ‘Allocation Justice’, we must try to ‘Law Economic Analysis of the Tort Law’ in spite of its limit.
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Law and Economics, Internalization of Externalities, Nash equilibrium, punitive damages, enforcement error, The complementary function of consolation money
