“Law and Economics” courses are sometimes criticized for inadequately explaining the normative criterion of “economic efficiency” and then applying this criterion throughout the course in a superficial and biased manner that pejoratively labels most governmental market interventions and wealth redistribution measures as inefficient. These criticisms have merit, and in this article I point out a number of conceptual problems, empirical difficulties, and normative shortcomings of the economic efficiency criterion that students need to understand in order to be able to effectively counter policy arguments that rest upon dubious efficiency assessments.
The eight specific shortcomings of the economic efficiency criterion that I address in this article are the pervasiveness of severe data limitations that render efficiency assessments unreliable; the indeterminacy regarding whether willingness to pay should be measured by offer prices or instead by asking prices; the difficulty of obtaining honest and accurate responses as to willingness to pay; the uncertainty as to the appropriate discount rate that should be used for discounting future policy consequences; the problem posed for efficiency analyses by endogenous preferences; the severe difficulties posed by the often-overlooked “problem of person-altering consequences;” the problematic nature of using willingness to pay as a measure of social value; and finally, the dubious nature of a normative criterion that does not give special primacy to rights.
Gregory Crespi, Presenting a Critical Perspective on “Economic Efficiency” in Law and Economics Courses,
SMU L. Rev.