What is 'Law and Economics'? What does it inquire? How is it related to economics and law? I will find answers to these questions with reference to the economic theory of R. H. Coase as a founder of 'Law and Economics'. Market is one of the most important concepts in economics. But market in itself, as Coase insists, has not been a subject of mainstream economic theory. It is simply assumed to be there and processes of exchange are analyzed, disregarding the function of real markets. Exchange transactions in reality are performed in the institutional settings and with positive costs. There are many kinds of market as institutions to promote exchanges. Some legal rules, whether they are enacted and enforced by private or public sectors, are necessary' for each market to function adequately. Every transaction costs something positive including expenses for instituting and administrating law. though standard microeconomics takes costless transactions for granted. If transaction cost were zero, legal positions would not have any effects on allocation of resources and the value of production would be maximized at any rate. This is the famous Coase's theorem. It has been, however, misunderstood in two ways by many economists. Firstly, it is often referred to in the context of negative externality such as pollutions. But Coase notes reciprocal character of the problem. If the polluter is supposed to be liable to the damage, he in turn will be damaged. It is essential to avoid the more damage. Secondly, with Coase's theorem he intended to demonstrate real transactions never happen without costs and to prompt the study of institutional framework of economic actions, but almost all economists have concentrated their attention to so-called the Coasian world, that is. the unreal world without transaction costs. I think 'Law and Economics' as a subject can take two forms. The first is the Coasian type, which studies how legal system influences the working of economic system. This belongs to economics. The second type, by contrast, is engaged by jurists including legal philosophers. It aims at mastering economic way of thinking and making use of it to understand and interpret law. Jurists who use 'Law and Economics'. however, cannot and should not propose any legal policy or interpretation without knowledge of the facts about economic working, which is the subject of positive economics. Economic theory, however, is incapable of answering a well-known normative question, that is. whether law should be efficient or not. for it only analyzes how people or economic system behavior when the goals are given. Economics thus cannot and does not take seriously rights in the sense of natural ones.
