Handout for Econ 522, Fall 2009, Disc #9, 11/13
Tort Law
1.1 no agreement (or implicit agreement); high transaction cost;
1.2 accidental—injurer doesn’t gain (compensatory damages VS punishment in Criminal Law)
1.3 The economic essence of tort law is its use of liability to internalize externalities created by
high transaction costs
Liability: ~ is just a transfer, which itself don’t affect efficiency directly. But tort liability can
“induce injurers and victims to internalize the costs of harm that can occur from failing to take
care.” “When potential wrongdoers internalize the costs of the harm that they cause, they have
incentives to invest in safety at the efficient level.”
2. Three elements must be present for recovery by the plaintiff under the traditional theory of tort:
harm, causation, breach of duty
3. Unilateral Precaution
3.1 expected harm: p(x)A
3.2 cost of precaution: wx
3.3 social cost: SC=wx + p(x)A
4. Legal Rules: (ignore the following notation if you find them confusing)
note: injurer’s precaution: xi; victim’s precaution: xv
(a, b, and c are usually for cases of unilateral precaution while the others are usually for bilateral)
a. no liability (efficient when only victim can take precaution)
b. strict liability (efficient when only injurer can take precaution) –draw injurer’s payoff in 3.
c. simple negligence –draw injurer’s payoff in 3.
d. negligence + contributory negligence
e. strict liability + contributory negligence
f. comparative negligence
Handout for Econ 522, Fall 2009, Disc #9, 11/13
5. Which of the legal rules in 4. will hold injurer liable under each of the following scenario?
a. dentist ill-handle an operation and the patient need a surgery to fix the problem
b. moving car hits parked car,
c. car hit pedestrian, who was J-walking
d. car hit pedestrian, who was J-walking and the car was not supposed to make left turn
e. medicine taken with milk will cause side effects, the producer has put reasonable warning, but
the patient still eat the madicine with milk.
6 Activity Level
Key concept: residual risk bearer
Question 1:
Suppose the price of taxi (or dental treatment) has been set by the government. There
is some chance of car accident happening with taxi’s. Will strict liability rule or
simple negligence lead to efficient precaution by the taxi driver? How about
passenger’s activity level?
Question 2:
Suppose that eating snakes becomes very popular and the business becomes very
competitive. Even the restaurants take care of the dish very carefully, there is still
some small chance that the customer will have some food poisoning. Will strict
liability rule or simple negligence lead to efficient precaution by the restauant? How
about customers’ activity level? If it depends, what does it depend on?
 A rule of strict liability leads to the efficiently level of injurer activity, but
an inefficiently high level of victim activity
 A rule of simple negligence leads to the efficient level of victim activity, but
an inefficiently high level of injurer activity
7. Possible HW question:
Concept: due care. Care is due if it is cost justifiable from the society point of view.
Consider the following setting of bilateral precaution. Bicyclists who ride at night can reduce the
risk of getting hit by a car by wearing reflective vests. Drivers can reduce the risk of hitting a
bicyclist by installing HID (High Intensity Discharge) headlights, which are brighter than normal
headlights. Imagine there’s only one driver and one bicyclist, and the likelihood of an accident is
as follows:
Injurer Precaution
Normal
HID Headlights
Headlights
Victim Precaution
No Vest
8%
3%
Vest
5%
1%
The damage done by an accident is $1,000, and compensation is perfect. Reflective vests cost
$15, and HID bulbs cost $30. There is no insurance – drivers bear their own liability costs.
What is the most efficient outcome?