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In essence, the idea is this:
If a person does one act, and with that one act incurs two different kinds of penalties, we only apply the stricter one. So if a person (for example) borrows a cow and then slaughters it on Shabbos, he incurs two penalties: monetary restitution to the owner of the cow, and the death penalty for violating Shabbos. In this case, Beis Din only applies the stricter punishement, death, and the lesser one, the money, is waived.
Again, there are other details and complexities, but this is the general idea.

Can anybody give me a logical explanation for this concept? I don't think the transgressor could care less about the fine when he's dealing with the death penalty.

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"Can anybody give me a logical explanation for this concept? I don't think the transgressor could care less about the fine when he's dealing with the death penalty." Did you just answer your own question? – jake Jun 29 '12 at 4:21
@jake Interesting position. I would't say that the Beit Din does't care about the lesser? – henryaaron Jun 29 '12 at 4:26
Well if Beis Din is concerned with a deterrent, then wouldn't it make sense that they are only concerned with what the transgressor is concerned with? BTW I don't really know why we're talking about Beis Din. While it's true that they mete out penalties, the rule of KLBM is derived from the Torah with drashos (e.g. 'im lo yihyeh ason'); it isn't really BD's decision. – Dov F Jun 29 '12 at 4:32
@DovF Because we are responsible for our actions. When we die and go to שמים, we’re evaluated and questioned and punished and this law isn’t in effect in שמים so why do we have it here? I believe if somebody deserves a punishment, he or she should get it no matter how many there are... – henryaaron Jun 29 '12 at 4:38
@DovF I understand and I respect that, but I disagree. Nobody ever said punishments was a precise word. – henryaaron Jun 29 '12 at 5:48

There are also practical ramifications - if he is liable to the damages, that liability would then attach itself to any relevant possessions he passes down to his inheritors, who would then be liable to pay the debt off.

There are a number of gemarot which discuss cases where application of Kim le mideraba mineh makes a difference at least a few of which are in mesechet makkot - if I find them I'll try post them here.

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I have heard an explanation that the more stringent punishment is like The sword of Damocles. http://en.wikipedia.org/wiki/Democles_sword

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To improve your answer, perhaps you should consider elaborating on the connection between this and the Sword of Damocles. – HodofHod Jun 29 '12 at 16:44

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