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The Economic Approach: Richard Posner

Economic Analysis of Law


Law and economics or economic analysis of law is the
application of economic theory (specifically microeconomic theory) to
the analysis of law. Economic concepts are used to explain the effects
of laws, to assess which legal rules are economically efficient, and to
predict which legal rules will be promulgated.
According to R. Posner, the popularity of this approach results
from two factors: the crisis of traditional legal doctrine (decisions
usually based either on intuition and vague moral beliefs) and the
success of the economics of non-market behavior (scientific data
which implies close to certainty).
Microeconomics: the part of economics concerned with single factors
and the effects of individual decisions

Richard Posner: Born January 11, 1939 is an American jurist and economist who was a United States
Circuit Judge of the United States Court of Appeals for the Seventh Circuit in Chicago from 1981 until
2017, and is a Senior Lecturer at the University of Chicago Law School. He is a leading figure in the field
of law and economics, and was identified by The Journal of Legal Studies as the most cited legal scholar
of the 20th century.
Posner Economic Analysis of Law
The basic assumption of economics that guides the version of economic analysis of law is that
people are rational maximizers of their satisfactions (with the exception of small children and the
profoundly retarded) in all of their activities (except when under the influence of psychosis or similarly
deranged through drug or alcohol abuse) that involve choice.
Like the criminal in deciding whether to commit another crime, the litigant deciding whether to
settle or litigate a case, the party to a contract deciding whether to break it, and the driver deciding how
fast to drive each agent acts to maximize her “preferences” in whatever environment she finds herself.
(Nonmonetary as well as Monetary satisfactions enter into the individual’s calculus of maximizing)
Areas of law economic analysis of law is applied includes antitrust, the regulation of public utilities
and common carriers, environmental regulation, the computation of damages in personal injury suits,
the regulation of the securities markets, and the calculation of alimony in divorce cases.
Economic Analysis of Law in Philippine Jurisprudence
Under Art. 2206 of the New Civil Code one of the component damages that may be awarded in
case of death of the victim is loss of earning capacity. The New Civil Code however does not provide on
how to determine loss of earning capacity.
Thus in the landmark case of Villa Rey Transit vs. CA 31 SCRA 511 (1963) the Supreme Court
lay down the formula for the computation of the award for damages for loss of earning capacity.
Net Earning Capacity = Life Expectancy x [Gross Annual Income less Necessary Living Expenses]
Life Expectancy= (2/3 x [80-age of death])
Thus in the case of People vs. Galvez 355 SCRA 266 (2001) where the plaintiff dies at the age
of 21 and was working as construction worker five days a week earning P150.00 per day, the Supreme
Court computed the victims lost earning capacity as follows:
Life Expectancy: 2/3 (80-21) = 39.33
Gross Annual Income: 150 x 261 (number of working days in a year) = P39, 150. 00
Necessary Living Expenses: P39, 150. 00 x .50 = P19, 575.00
Thus the Loss Earning Capacity: 39.33 x (P39, 150. 00 - P19, 575) = P769, 884.75

Reporter: Arvin D. Hamor