Prices and Sanctions

Abstract

Scholars of jurisprudence traditionally view law as a set of obligations backed by sanctions, or commands backed by threats.' In contrast, economists tend to view law as a set of official prices.2 Associated with each of these viewpoints is a characteristic blindness. The jurisprudential perspective blinds lawyers to the fact that officials cannot regulate the economy efficiently by giving orders.3 Instead, they must rely upon legal instruments similar to prices. Conversely, the economic perspective is blind to the distinctively normative aspect of law, viewing a sanction for doing what is forbidden merely as the price of doing what is permitted. In brief, the economic analysis of law lacks a clear account of sanctions, and the jurisprudential tradition lacks a good account of prices. This Article attempts to bridge the two traditions by developing a theory about the difference between the effect of prices and sanctions upon behavior. Part I of this Article offers working definitions of the two key concepts, defining a sanction as a detriment imposed for doing what is forbidden, and a price as money extracted for doing what is permitted. Officials should create prices to compel decisionmakers to take into account the external costs of their acts, whereas officials should impose sanctions to deter people from doing what is wrong. Part I then explains the difference in the way sanctions and prices typically control behavior. A sanction typically creates an abrupt jump in an individual's costs when he passes from the permitted zone into the forbidden zone where behavior is sanctioned. This abrupt