ECONOMIC ANALYSIS OF OSTENSIBLY PARETO EFFICIENT LAWS

Author: Shivansh Soni (National Law School, Nagpur)

Introduction

The law which we study today is very much dependent upon the normative sciences or ‘Normative Law’. The basic idea of which is the efficiency of law.[1] The meaning of this word could be understood with the help of Pareto’s Principles and a related idea which is Kaldor Hicks Efficiency. Efficiency thus is a very significant normative criterion used for economic analysis of Law[2]. Almost all the plausible foundations of economics are dependent upon the principle of utility, used as a measure of the good[3]. The efficiency of the economy can be gauged with the help of Pareto Criterion which has also been in recognition for some time as a regulative norm to the extent at which the preferences held by individuals are satisfied.[4]

Welfare economics is concerned about whether or not any allocation of resources is efficient. The criterion mostly used for evaluating this is whether social welfare increases or decreases[5] as a result of a specific change in the economic state a) Pareto Optimality b) Kaldor–Hicks Efficiency. Pareto Optimality is based upon the normative approach used in law and economics which basically includes value judgment. One of the basic ideas involved in law and economics is that law should be efficient.[6] Pareto gave the criterion to determine the state of welfare in the society according to which when any change in the economy takes place that makes anyone person better off and no one worse off is regarded as an improvement in social welfare.

Pareto efficiency is a minimal notion of efficiency and doesn’t necessarily result in the distribution of resources which is socially desirable and also does not claim anything about equality, or the overall well-being of the society[7]. In this article, the author=will be analyzing the different laws and check whether a particular law is Pareto optimum or not through the cases decided by the apex court.[8] The overarching aim of this article is to advocate the fact that no allocation of resources can be Pareto efficient (by means of Law).

Pareto Optimality and Law

According to Kaldor Hick's criteria, “if by a change in policy a person a become better off and the other had become worse of the one who is better must compensate the one who is worst off”, this situation is said to be Pareto optimal. Pareto Optimality, on the other hand, is defined as a state of affairs in which resources are distributed in such a way that it is not possible to make an individual better off without making at least one other individual worse off from before the change which can be understood with an analogy to ‘Pareto improvement’[9] and ‘Pareto efficiency’.[10] The compensation that is paid into the one who suffers by the court can be tested on this criterion. It could be seen whether the particular law is Pareto optimum or not by seeing the welfare it offers when the compensation is awarded to a victim and also whether the two conditions of Pareto optimality are satisfied are not. Though it is difficult to that the situation is absolute Pareto or not, but potential Pareto can be checked through Keldor-Hicks Criteria.

3. Analysis of Indian Cases

Land Acquisition Cases

Narmada Bachao Andolan v. Union of India[11]- In this case, families were displaced from their native place by the government in lieu of building a dam. The case was filed in the apex court, and the court promised to pay a sum of amount as compensation to the displacement. Section 27 of the Land Acquisition Act 2013 talks about the determination of the amount of compensation, states that “the collector after having determined the market value of the land to be acquired, shall calculate the total amount of compensation to be paid to the landowner (whose land has been acquired) by including all assets attached to the land.”[12]

In the case discussed above, where few families were compensated and a few were not. Based on the figures, it was calculated that 681 families are yet to be paid compensation which consists of 510 families affected from the project which originally chose the Special Rehabilitation Package additional to the 171 families which claimed the land for land. During the course of negotiations, it was decided that the compensation to these 681 families should be determined under the Land Acquisition Act, 2013, and the provisions analogous this Act. However, after evaluations of the above scenario and taking note of the value of land which fluctuated from 15,00,000/hectare, 80,00,000/hectare, it was then decided that compensation should be awarded on an average basis.

Considering the suggestions made at the request of the counsel of the opposite party, the court directed the concerned authority, to compensate to the 681 families of the people affected by the project, who have not yet received any compensation, and those also who have been described above @60,00,000 per family.

· In this following case, it can be seen that the people who have to leave their land are either given money or land in return for their displacement.

· The people who are beneficiaries of the dam have to pay them in order to rehab who are being displaced and in turn are receiving benefits arising out of building a dam.

Cost-benefit analysis- Cost-benefit analysis is a tool for policy assessment that quantifies each and every consequence of policy in monetary terms to the society under the economy. Owner of the lands who are rehabilitated. The cost incurred by the landowners is the loss of livelihood and loss of land. The benefit is the land at the other place or the compensation. This is efficient allocation as per CBA, the landowners are given proper compensation or land in lieu of the loss of land and livelihood.

Tata Motors Ltd. v. State of West Bengal (Singur Case)[13]- The land was acquired by the state government for Tata Motors Ltd.’s plant to build the world’s cheapest car, the Nano. This acquisition led to violence. This acquisition was held illegal and void, it was said that it did not meet the requirement of the Land Acquisition Act, 1894. The land was returned to the landowners. It was seen that there was a lack of compensation that was paid for a major loss of livelihood, besides land.

The following judgment has definitely made the owners of the land better off; the lands were returned to them and also, they were allowed to keep the compensation paid to them. Tata had to withdraw for them land shift its production plant to Gujarat. Potential Pareto optimality through Kaldor Hicks cannot be checked.[14]

Workmen Compensation Cases

Subulaxmi v. Managing Director, Tamil Nadu State Transport Corporation and Anr[15]- The High Court in this judgment while deliberating upon the amount of compensation to be paid, didn’t grant any compensation for the disability, it rather ordered to enhance the future income of the employees to Rs.1,15,000 and added Rs 75,000 for replacement of artificial limb and for any further future medical expense.

The Court further held that while determining the amount of compensation to be paid to the victims of the accident, who are permanently or temporarily disabled, different approaches need to be followed. In cases analogous to these, the courts, the tribunals should make a broader guess for fixing the quantum of compensation. It was observed that the ends of justice will be met only by providing them with a compensation of Rs 1,50,000 for the pain, suffering, and trauma caused to them due to the amputation of a leg. It was, however, considered absolutely just and reasonable to award the victim a sum of Rs 1,50,000 for the loss of amenities and enjoyment of life. Applying the Kaldor-Hicks Criteria to check potential Pareto optimality, if the one who is better off compensates the one who is worse off and thus brings him to the original position the situation becomes Pareto optimal.

In the present situation, the amount of compensation awarded is enough to cover up the losses that have made him worse off. The said compensation can be called as Pareto optimal.

Motor Vehicle Accident Case

B. Kothandapani v. T.N. State Transport Corpn. Ltd.[16]- The claimant, in this case, had suffered and sustained grievous injuries in a vehicular accident, reported to have occurred on 21st May 1998 for which the appellant claimed before the Motor Accidents Claims Tribunal of Chennai for a sum of Rs. 12 lakhs as a compensation for the injuries suffered. The Tribunal after analyzing the case found out that the accident occurred due to the negligence of the driver appointed by the Tamil Nadu State Transport Corporation (Villupuram Division III), Kancheepuram, and the court in this furtherance ordered to pay a compensation amounting to Rs. 5,05,053. The appellant and the tribunal, both filed an appeal in the High Court for the enhancement of the compensation and the reduction of compensation respectively. And as a result of which the High Court ordered the reduction of compensation to Rs. 1,00,000.

After considering what doctors had clarified about the injuries, treatment received and the disability suffered due to partial loss of eyesight and amputation of the middle finger of the right hand and also due consideration of the nature of his work, partial loss in eyesight and loss of middle finger of the right hand, did not only affected his earning capacity but also had affected his normal avocation and the day-to-day work he undertakes.

Taking this into account, the Supreme Court was of the view that the Tribunal was fully justified in granting a sum of Rs. 5,05,053.45 towards permanent disability. Furthermore, the Supreme Court in the final decision made the Corporation liable to pay the sum of Rs. 5,05,053with interest as awarded by the Tribunal.

The sum awarded to cover up the losses that have made the person worse off is Pareto optimal. The loss that he has suffered could be covered through the amount that is awarded.Hence, applying the Kaldor-Hicks Criteria, when a person who becomes worst off is compensated by one who is better off leads to Pareto optimality.

Environment Pollution Cases

M.C. Mehta v. Union of India[17]- This judgment is significant as the court’s formulation of the extent of liability of the industries engaged in the hazardous activities or the inherently dangerous activities was established as a principle. The Sri Ram Food and Fertiliser Corp. (industry) was asked to pay a sum of Rs. 35,00,000 in the bank and a guarantee a sum of Rs.15,00,000 to the court for the compensation which is to be paid to the person who would prove the damage caused to him or suffered by him because of the Oleum Gas Leak before the court of law.

The amount decided by the court in order to determine the loss that has made the person worse off could not be called Pareto optimum. The amount decided may or may not be sufficient enough to cover up the losses suffered by the people, in lieu of benefits earned by the company.

Indian Council for Enviro Legal Action v. Union of India[18]- In this case, five chemical industries were producing H-acid and also produced ETP sludge and azo dye got discharged into an open compound that flowed through a canal across the nearby roads. The rainwater washed away the sludge deep into bowels of Earth which caused pollution into the river water and underground water measuring up to 70ft. beneath the ground within seven miles of the. It left the fields in the area unfertile for cultivation.

The people of the village and also nearby villages had to migrate. The Apex court said that liability to compensate in this case is twofold:

· To compensate for the for inconvenience and health loss to the victims; and the other,

· To retrofit for the environmental degradation of the soil, vegetation cover, and the underground water of that area. The court ordered the concerned ministry to recover money from the units. The compensation of 4,00,00,000/- was computed to revered the power of soil and water contamination. No compensation was paid to villagers.

The compensation is not Pareto optimum as no compensation has been made to people who have suffered losses. The loss of income and health was not considered and they were left worse off.


4. Conclusion

The analysis of the cases mentioned above gives us a clear idea that it is difficult to make a situation Pareto optimal. The absolute Pareto optimality cannot be achieved what can be achieved is only potential Pareto optimality, through the Kaldor Hicks Criteria. The hypothesis of the researcher stands positive that Pareto optimality cannot be determined in its absolute sense. It can be tested through the amount of compensation that would be paid to improve the condition of the one who is worse off, but cannot make one person one person better off and no one worse off.

[1] Jules L. Coleman, Efficiency, Exchange, and Auction: Philosophic Aspects of the Economic Approach to Law, 68 Calif. L. Rev. 221 (1980). [2] David Campbell, On What is Valuable in Law and Economics, 8 Otago L. Rev. 489 (1996) “(…The first or basic claim of welfare economics is that a market which conforms to the assumptions established by neo-classical microeconomics for general competitive equilibrium is a perfectly efficient mechanism for the allocation of goods…)”. [3] Jules L. Coleman, “Economics and the Law: A Critical Review of the Foundations of the Economic Approach to Law”, 94 Ethics 649-679 (1984). [4] “Pareto Optimality and the Rule of Law,” in Method and Morals in Constitutional Economics: Essays in Honor of James M. Buchanan, (Studies in Economic Ethics and Philosophy), edited by G. Brennan, H. Kliemt, and R. D. Tollison, Berlin, Springer, 237–252 (2002). [5] Qi Zhou, The Evolution of Efficiency Principle: From Utilitarianism to Wealth Maximization, SSRN Electronic Journal (2005). [6] Legal Theory Lexicon: Efficiency, Pareto, and Kaldor-Hicks, Legal Theory Blog (2020), https://lsolum.typepad.com/legaltheory/2020/05/legal-theory-lexicon-efficiency-pareto-and-kaldor-hicks.htm l (last visited Jun 6, 2020). [7] Robert Alexy, Constitutional Rights, Balancing, and Rationality, 16 Ratio Juris 131-140 (2003); Robert Alexy, The Construction of Constitutional Rights, 4 Law & Ethics of Human Rights 21-32 (2010). [8] Kerry Krutilla, Using the Kaldor-Hicks tableau format for cost-benefit analysis and policy evaluation, 24 Journal of Policy Analysis and Management 864-875 (2005). [9] Pareto Improvement is the state of allocation of resources in which there is an improvement for one individual without anyone being worse off. It is commonly used in game theory. [10] Pareto efficiency is also known as Pareto optimality. [11] Narmada Bachao Andolan v. Union of India, [2000] 10 SCC 664. [12] Sankalp Sharma et al., Land Acquisition in India: A Pareto and Kaldor-Hicks Perspective, 7 Land 66 (2018). [13] Tata Motors Ltd. v. State of West Bengal, 2012 SCCOnline Cal 5828. [14] Singur Case, Livemint.com. [15] Subulaxmi v. Managing Director, Tamil Nadu State Transport Corporation and Anr., (2012) 10 SCC 177. [16] B. Kothandapani v. T.N. State Transport Corpn. Ltd, (2011) 6 SCC 345. [17] MC Mehta v. Union of India, 1987 SCR (1) 819. [18] Indian Council for Enviro Legal Action v. Union of India, (1996) 2 JT (SC) 196

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