What a lawyer needs to know about economics: a rational (?) eye on everything

This chapter encapsulates the basic economic knowledge a lawyer needs for performing an economic analysis of the law. It starts with the classic economic theory of rational choice, as revisited and improved by game theory and behavioral economics: how humans are supposed to cover their needs through free transactions and markets, where supply meets demand in ideal conditions and efficiently allocates goods at minimum cost. Nevertheless, measuring the efficiency of human actions (according to the Pareto and Kaldor/Hicks criteria) and achieving social welfare is not that simple. It depends on how we define welfare: only as profit maximization or also as social justice and sustainability? In any case, both our rationality and the markets record numerous failures and transaction costs: from information asymmetries, externalities and principal/agent costs to problems of collective action (prisoner’s dilemma, Arrow’s impossibility theorem) and market failures (missing markets, distorted competition, macroeconomic problems).