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Economics of Tort Law

Economics of Tort Law

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Economics of Tort Law

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  1. Economics of Tort Law

  2. Tort Law • Tort – injury to person or property • We are interested in unintentional torts, inadvertent accidents. • Injuries sustained by breach of contract are covered under contract law

  3. Bureau of Justice Statistics, 2005State Courts

  4. Bureau of Justice Statistics, 2005State Courts

  5. Bureau of Justice Statistics, 2005

  6. Bureau of Justice Statistics, 2005

  7. Punitive Damage Awardsin Large Counties, 2001

  8. Tort liability A court imposed obligation on the tortfeasor to pay for a victim’s losses.

  9. Why is there tort liability? • There are situations in which the transaction costs between potential injurers and potential victims are so high that they cannot bargain about liability prior to an accident. • Elements • Breach of a preexisting duty of care • No contract exists between the victim and the injurer • How can we affect pre-accident behavior when victim and injurer cannot assign liability by contract? Economic Analysis of Tort Liability

  10. An efficient system would minimize these elements of cost • Cost of injuries • Cost of precaution • Cost of administration • Indirect costs to economy An efficient system would internalize externalities and provide incentives for efficient precaution and activity • Precaution is a function of the resources devoted to avoiding potential harm • Activity is a function of the volume or frequency of risky behavior

  11. Traditional tort liability requires three elements • Breach of Duty - The defendant’s act or failure to act must constitute the breach of a duty owed to the plaintiff by the defendant • Harm - The plaintiff must have suffered a harm • Cause - The defendant’s act or failure to act must cause the harm

  12. Element 1: Breach of duty • Two possible rules • Strict liability rule - only harm and cause are required for a tort • any harm is a breach of due care • Negligence rule - requires a minimum duty of care

  13. Duty of care • A legal standard prescribing the minimum acceptable level of precaution • Violation of the due care standard represents negligence • Under strict liability any harm violates due care standard • Due care standard is based upon a reasonable person

  14. Element 2: Harm • There typically must be an actual harm. • Liability law does not compensate for exposure to risk • A pollutant that reduces property values may result in an actual harm, but the future risk of illness is not an actual harm • Perfect compensation would compensate for both property losses and intangible harm. • Should reimbursement occur for intangible harms? • How do we determine the value of intangible harms? (The death of a child.)

  15. Element 3: Cause • “But for” test (cause in fact) • Problem when there are multiple causes (ambiguous causation) • Ex., Medical malpractice cases • Proximity in the law is imprecise • “But for” test does not distinguish between proximate causes and remote causes • Proximate cause satisfies the “but for” test and is sufficiently direct to be the determined the legal cause of the injury

  16. Palsgraph v. LIRR (NY 1938) • Plaintiff was standing on the platform when another passenger was having some difficulty boarding a train. While a LIRR guard helped him onto the train a package he was holding became dislodged and fell on the platform. The package contained fireworks which exploded. The explosion toppled a scale which struck the plaintiff • “The conduct of the defendant's guard, if a wrong in its relation to the holder of the package, was not a wrong in its relation to the plaintiff, standing far away. Relatively to her it was not negligence at all. Nothing in the situation gave notice that the falling package had in it the potency of peril to persons thus removed. “

  17. An efficient system would minimize these elements of cost • Cost of injuries • Cost of precaution • Cost of administration • Indirect costs to economy An efficient system would internalize externalities and provide incentives for efficient precaution and activity • Precaution is a function of the resources devoted to avoiding potential harm • Activity is a function of the volume or frequency of risky behavior

  18. The economic purpose of tort law is to minimize the social cost of accidents. We will assume only cost of injury and cost of precaution x = unit of precaution w = cost of a unit of precaution A = monetary value of the harm p(x) = probability of harm

  19. Minimize social cost

  20. Total Costs $ p(x)A = Expected Accident costs x = Amount of precaution

  21. Total Costs $ wx = precaution cost p(x)A = Expected Accident costs x = Amount of precaution

  22. Total Costs $ Total Cost = p(x)A + wx wx = precaution cost p(x)A = Expected Accident costs x = Amount of precaution

  23. Total Costs $ Minimum = Efficient amount of precaution Total Cost = p(x)A + wx wx = precaution cost p(x)A = Expected Accident costs x = Amount of precaution x*

  24. The same issue with slopes Marginal Costs $ Rate at which Accident costs decrease x = Amount of precaution

  25. The same issue with slopes Marginal Costs w Marginal cost of precaution Rate at which Accident costs decrease x = Amount of precaution

  26. The same issue with slopes Marginal Costs Minimum = Efficient amount of precaution w Marginal cost of precaution Rate at which Accident costs decrease x = Amount of precaution x*

  27. Precaution • Unilateral precaution • Only the injurer or only the victim can influence the probability or severity of injury • Bilateral precaution • Both the injurer and the victim can influence the probability or severity of injury

  28. Strict Liability • Injurer is liable for all harm • Precaution does not reduce or eliminate liability • The opposite of strict liability is no liability

  29. Regulating Risk with a Liability Standard • Strict liability with perfect compensatory damages gives the victim no incentive to take precaution • No liability gives the injurer no incentive to take precaution

  30. Strict liability • Appropriate when only unilateral precaution by the injurer is possible • Injurer has incentive to minimize total social cost • Assumes costs can be accurately measured and injurer will be found liable for all harms he caused

  31. Strict Liability versus No Liability • Strict Liability • Appropriate when only unilateral precaution by the injurer is possible • Injurer has incentive to minimize total social cost • Assumes costs can be accurately measured by injurer • Injurer internalizes cost of injury • No liability • Appropriate when only unilateral precaution by the victim is possible • Victim has incentive to minimize total social cost • Assumes costs can be accurately measured by victim • Victim internalizes cost of injury

  32. Liability QuestionsUnilateral v. Bilateral Precaution • Should airlines be strictly liable for crashes? • Should manufacturers be strictly responsible for consumer injury? • Defective products • Defect in design • Defect in manufacture • Defect in warning • Knives, Guns, Toasters

  33. Bilateral precaution • When bilateral precaution is possible neither strict liability or no liability causes both the victim and the injurer to take the optimal level of precaution. • The party who does not internalize the harm will not take adequate precaution. • Negligence may be the preferred rule when bilateral precaution is possible .

  34. Negligence standard • Simple negligence: Injurer is liable only if precaution is less than due care standard; otherwise victim is liable • Negligence rule with perfect compensation and the legal standard set to the efficient level of care gives the injurer and victim incentives for efficient precaution. • Injurer has incentive to satisfy the due care standard • Victim responds as if there is no liability, therefore victim has efficient incentive for precaution

  35. If the DCS is too low: Total Costs Minimum = Efficient amount of precaution DCS Total Costs wx = precaution cost Expected Accident costs x = Amount of precaution x*

  36. If the DCS is high: Total Costs Minimum = Efficient amount of precaution DCS Total Costs wx = precaution cost Expected Accident costs x = Amount of precaution x*

  37. If the DSC is high can get excessive caution: Total Costs Minimum = Efficient amount of precaution DCS Total Costs wx = precaution cost Expected Accident costs x = Amount of precaution x*

  38. If the DCS is very high : Total Costs Minimum = Efficient amount of precaution DCS Total Costs wx = precaution cost Expected Accident costs x = Amount of precaution x*

  39. Negligence Rules • Negligence rules give the victim and the injurer efficient incentives for precaution • Negligence rule is preferred when there is bilateral precaution

  40. Negligence rules • Simple negligence • Negligence with defense of contributory negligence • Comparative negligence • Strict liability with defense of contributory negligence

  41. Activity versus Precaution • Activity - repeated risky behavior • The more you drive, the more likely that you will have an accident • Expected harm is a function of activity, harm and precaution • The more we engage in risky behaviors, the greater is the expected harm • The less precaution we take, the greater is the expected harm • Strict liability forces the injurer to internalize the harm related to activity, negligence does not.

  42. Activity vs. Precaution • With simple negligence the carnival operator is relieved of all liability as long as he adheres to the duecare standard. • Even with inspections, mishaps can occur, passengers can be injured. • Riders put their set belts on because they can’t be sure the ride is safe. They will make sure restraints are functioning and will keep their hands and feet in. • There is no incentive for the carnival operator to limit the passengers on the ride or the number of carnivals. • Result • Optimal precaution, but too much activity • With strict liability the number of riders would be less but there would be no incentive for the riders to take due care

  43. Trucking Example • Assume driver is only liable if he is negligent • If he is not negligent, damages are not related to the number of trucks on the road • The number of accidents is positively related to the number of trucks on the road • Increased probability that you will be in an accident with a truck • With strict liability the trucking company has both an incentive for taking precaution and limiting mileage. The victim has no incentive for precaution or limiting activity.