ABSTRACT
Several concepts pervade law and economics. This chapter includes the Coase Theorem; rationality; Pareto and Kaldor-Hicks benchmarks of efficiency; shadow markets and prices; game theory, dominant strategies and Nash equilibria; and appetite for risk. They are also fundamental to the economic analysis of tort, crime, property, contract, and myriad legal subjects beyond. The Coase Theorem exposes two significant, albeit related, defects underlying the use of Pigouvian taxes. The Coase Theorem holds that, freed of transaction costs, the market will efficiently allocate property rights regardless of how the government first assigns them. Efficiency is a metric that economists use variously to describe and prescribe laws. There are several theories of rational choice. The most simple is expected-value theory. Expected-value theory predicts that a rational actor weighs a choice by summing each possible outcome discounted by the chance of each one's occurrence. People will follow expected-value theory only if they are risk neutral. Appetite for risk thus informs a person's rational choice.
