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SOME APPLICATIONS OF THE RELATION BETWEEN LAW AND ECONOMICS

Kurnia Togar P. Tanjung, ME

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The Virtue of Economics

People = Increasing

Resources = Limited/Decreasing

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Law + Economics

  1. Economics Law
  2. Law(s) in Economic Activities
  3. Law and Economics
  4. Law and Economic Development

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Economics Law

The basic principle(s) on how economics works (i.e. law of supply and demand; Gossen’s Laws, etc)

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The Law of Supply and Demand

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Law(s) in Economic Activities

Some set of rules or regulations which have been legislated to regulate economic (business) activities; usually after/to avoid free market failures (i.e. investment law, capital market law, law on commmerce, administered price etc)

The Administered Price

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Law and Economics

The application of economic theory (mostly microeconomic theories) to the analysis of law; economic concepts are used to explain the effects of law, to assess which legal rules are economically efficient and to predict which legal rules are socially desired and will be promulgated

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Law and Economic Development

Studies on law making process which puts the measurements of economic development (i.e. economic growth (GDP), per capita income (GDP per capita), human development index, etc) as determinant factors

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Cont’d

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The Graph

The Reality / Behavior / Das Sein

The Law / Order / Das Sollen

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1st Application: Cost-Benefit Analysis

Social Net Benefit = Benefit (Social) – Cost/Price (Enforcement)

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A justifiable regulation only happens when benefit exceeds cost; if not then better not regulate at all

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Cont’d

  • Example: Regulator (Environmental Protection Agency) must decide whether power plants should install scrubbers in smokestacks.
    • Costs: the cost of installing scrubbers x number of factories
    • Benefits: avoided medical costs subsidized by government (for example, less emphysema) x affected people

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Regulation

Benefits

Costs

Net

Decision

Weak

$1 million

$10 million

- $9 million

Reject

Moderate

$16 million

$15 million

+$1 million

CB-justified

Strict

$22 million

$20 million

+$2 million

Optimal

Super-strict

$23 million

$30 million

-$7 million

Reject

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2nd Application

  • The Case: The Indonesian HoR wants to forbid liquor selling in public sphere (still can be sold but very limited in certain allowed areas).
  • The Proposal: sellers and distributors can be criminalized as well as consumers/drinkers (if violate regulated limitations).
  • The Argument: liquor consumption can lead to certain criminal acts; traffic fatalities caused by DUI; healthy reasons.
  • The Data: the consumption of alcohol in Indonesia: 0,6 liters/capita (the highest, Belarus, 17,6; Malaysia 1,7; Singapore 2,9) (World Bank, 2015).

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Cont’d (The Finding)

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US’ Story

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