5 ideas
Judge-made common-law doctrines in property, contract, tort and crime are best explained as rules that maximize social wealth, even though judges rarely say so explicitly. Inefficient rules generate more disputes and get relitigated and revised, while efficient ones persist, so over time the doctrine converges on efficient outcomes.
A party is negligent when the burden of taking precautions (B) is less than the probability of the loss (P) times the magnitude of the loss (L). Liability rules built on B < PL push actors to invest in exactly the level of care that is cost-justified, no more and no less.
Legal sanctions, liability rules and damages act as prices that people respond to the way they respond to market prices, so law shapes behavior by changing the costs of actions. Viewed this way, a criminal sentence or a damage award is a charge for conduct, and the question becomes whether the charge is set at the level that yields efficient behavior.
Where transaction costs block voluntary bargaining, courts should assign rights and liabilities to whichever party would have bought them in a costless market. Examples include placing liability on the cheapest cost avoider and filling contract gaps with the terms the parties would have chosen.
A party should be allowed to break a contract when performing is worth less than paying the other side's expectation damages, because the breach moves resources to a higher-valued use and leaves the promisee no worse off. Expectation damages, rather than specific performance or punitive awards, are the remedy that makes such breaches profitable only when they are efficient.