Unit 3: The Economic Analysis of Tort Law
1
Overview
Tort:
A legally wrongful act for which a person becomes
liable for harm caused to another.
Examples:
-
Nuisance
Trespass
Accidental Harm (Negligence)
Assault and Battery
Defamation
2
Overview
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•
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Economic essence of negligence law
Traditional legal theory of negligence liability
The Unilateral Precaution Model of Negligence
The Bilateral Precaution Model of Negligence
Sequential Care Accidents
Setting Legal Standards
Errors, Vagueness, and Uncertainty
Administrative Costs
3
A. The Economic Essence of Tort Law
Objective: To be able to
give an overview of
economic interest in
negligence law.
4
What are some examples of accidents that would
be subject to the law of negligence?
5
Why can’t we rely on bargaining in the law of
negligence?
6
A. The Economic Essence of Tort Law
Low Transaction Costs
High Transaction Costs
Parties can negotiate
how to allocate the risk
of harm
Parties can’t negotiate
how to allocate the risk
of harm
Contract Law
Negligence Law
7
A. The Economic Essence of Tort Law
Social Objectives:
Compensate victims for injuries
Deter unreasonably risky behaviour
Economic Objective:
Optimal deterrence through monetary
incentives
 Require both injurers and victims to internalize the costs of
harm so they will take efficient levels of precaution
8
What makes the law of negligence so amenable to
economic analysis?
9
B. The Legal Theory of Negligence
Objective: To be able
to use the law of
negligence to assess a
person’s risk for
liability in negligence.
10
If you accidentally harm someone, are you always
responsible to compensate them? Explain.
11
B. The Legal Theory of Negligence
The Tort of Negligence:
When is an injurer liable for accidental
harm?
1. The injurer owed the victim a duty to take care not to cause
harm
2. The victim suffered harm
3. The harm was caused by the injurer’s act or failure to act
4. The applicable liability rule is satisfied
12
B. The Legal Theory of Negligence
Liability Rules:
1. No Liability – the injurer is never responsible for accidental
harm
2. Strict Liability – the injurer is always responsible for accidental
harm
3. Simple Negligence – the injurer is responsible for accidental
harm only if the injurer failed to meet the legal standard of care
13
B. The Legal Theory of Negligence
Defence of Contributory Negligence:
If the victim failed to meet the legal standard of care, then the
victim is responsible for a portion of the harm.
14
How could we explain harm in economic terms?
15
B. The Legal Theory of Negligence – Harm
16
How do intangible losses complicate
compensation?
17
B. The Legal Theory of Negligence – Cause
Two types of causation:
1. Causation in Fact
2. Causation in Law
18
B. The Legal Theory of Negligence – Cause
Jamie was late for a job interview. He was speeding and didn’t
notice a light turn red. Sam saw the “walk” light and entered the
intersection. Jamie ran the red light and hit Sam. Sam went to the
hospital with several fractures and internal bleeding.
Did Sam suffer harm?
Did Jamie’s driving behaviour cause Sam’s harm in fact?
19
B. The Legal Theory of Negligence – Cause
Causation in Fact:
- Law assesses using the “but for” test
- Economics assesses by interdependence of utility (or
profit) functions
20
B. The Legal Theory of Negligence – Cause
Causation in Law:
- Is the harm sufficiently proximate to the defendant’s
actions?
- Is the type of harm suffered reasonably foreseeable?
21
B. The Legal Theory of Negligence – Cause
Jamie was late for a job interview. He was speeding and didn’t notice a
light turn red. Sam hadn’t entered the intersection yet. Seeing Jamie
speed through startled her, and Sam jumped backwards. She knocked
over a ladder. The falling ladder hit a post, loosing a large dog that had
been tied there. The dog jumped at Sam, growling, then ran away. This
incident gave Sam a severe fear of dogs, for which she receives
therapy.
Did Sam suffer harm?
Did Jamie’s driving behaviour cause Sam’s harm in fact?
Was the dog phobia proximate to Jamie’s driving behaviour?
Is it reasonably foreseeable?
22
B. The Legal Theory of Negligence – Duty of Care
A person owes a duty of care to any class of persons whom they
can reasonably foresee could be harmed by their actions.
23
B. The Legal Theory of Negligence – Liability Rule
Let:
𝑥 = 𝑙𝑒𝑣𝑒𝑙 𝑜𝑓 𝑝𝑟𝑒𝑐𝑎𝑢𝑡𝑖𝑜𝑛
𝑥 = 𝑙𝑒𝑔𝑎𝑙 𝑠𝑡𝑎𝑛𝑑𝑎𝑟𝑑 𝑜𝑓 𝑐𝑎𝑟𝑒
Injurer is liable if:
𝑥<𝑥
No Liability:
𝑥=0
Strict Liability:
𝑥=∞
Negligence:
0<𝑥<∞
24
B. The Legal Theory of Negligence – Liability Rule
Jamie was late for a job interview. He was speeding and didn’t notice a
light turn red. Sam saw the “walk” light and entered the intersection.
Jamie ran the red light and hit Sam. Sam went to the hospital with
several fractures and internal bleeding.
Who is liable under a No Liability Rule?
Who is liable under a Strict Liability Rule?
Who is liable under a Simple Negligence Rule?
Who is liable if we add a Defence of Contributory Negligence?
25
B. The Legal Theory of Negligence
Summary:
• The law of negligence allocates responsibility (liability) for accidental harm
between injurers and victims
• An injurer is liable only if:
• The injurer owed the victim a duty of care
• The victim suffered harm
• The injurer caused that harm
• The applicable liability rule is satisfied
• The different liability rules are defined by the legal standard of care:
• No Liability
• Strict Liability
• Simple Negligence
• May also have a Defence of Contributory Negligence
26
C. The Unilateral Precaution Model
Objective: To be able to
use the Unilateral
Precaution Model to
assess the efficiency of
different liability rules.
27
C. The Unilateral Precaution Model
Let:
𝑥 = 𝑙𝑒𝑣𝑒𝑙 𝑜𝑓 𝑝𝑟𝑒𝑐𝑎𝑢𝑡𝑖𝑜𝑛
𝑤 = 𝑐𝑜𝑠𝑡 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡 𝑜𝑓 𝑝𝑟𝑒𝑐𝑎𝑢𝑡𝑖𝑜𝑛
𝐴 = 𝑚𝑜𝑛𝑒𝑡𝑎𝑟𝑦 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 ℎ𝑎𝑟𝑚 𝑓𝑟𝑜𝑚 𝑎𝑛 𝑎𝑐𝑐𝑖𝑑𝑒𝑛𝑡
𝑝 = 𝑝𝑟𝑜𝑏𝑎𝑏𝑖𝑙𝑖𝑡𝑦 𝑜𝑓 𝑎𝑛 𝑎𝑐𝑐𝑖𝑑𝑒𝑛𝑡
p
p(x)
x
28
C. The Unilateral Precaution Model
Injurer’s Private Costs:
𝑃𝐶𝐼 = 𝑤𝑥
Victim’s Private Costs:
𝑃𝐶𝑉 = 𝑝 𝑥 𝐴
Expected Social Cost:
𝐸 𝑆𝐶 = 𝑤𝑥 + 𝑝 𝑥 𝐴
29
C. The Unilateral Precaution Model
𝑀𝐵 = 𝑀𝐶
𝑀𝐵 = −𝑝′ 𝑥 𝐴
𝑀𝐶 = 𝑤
−𝑝′ 𝑥 ∗ 𝐴 = 𝑤
30
C. The Unilateral Precaution Model
Objective:
Determine which liability rule(s) give the
injurer the incentive to choose x = x*
31
Will a No Liability Rule give the injurer incentive
to take the efficient level of precaution? Explain.
32
C. The Unilateral Precaution Model
No Liability Rule:
Injurer’s Problem
min 𝑃𝐶𝐼 = 𝑤𝑥
𝑥
33
Will a Strict Liability Rule give the injurer
incentive to take the efficient level of precaution?
Explain.
34
C. The Unilateral Precaution Model
Strict Liability Rule:
Injurer’s Problem
min 𝑃𝐶𝐼 = 𝑤𝑥 + 𝑝 𝑥 𝐴
𝑥
 The injurer’s objective coincides with the social objective
35
Will a Simple Negligence Rule give the injurer
incentive to take the efficient level of precaution?
Explain.
36
C. The Unilateral Precaution Model
Simple Negligence Rule:
Injurer’s Problem
min 𝑃𝐶𝐼 = 𝑤𝑥 + 𝑝 𝑥 𝐴 𝑖𝑓 𝑥 < 𝑥
𝑥
𝑤𝑥
𝑖𝑓 𝑥 ≥ 𝑥
37
C. The Unilateral Precaution Model
Conclusion:
In situations of unilateral precaution, both strict
liability and simple negligence give incentive for
efficient precaution.
Which rule is more just?
38
D. The Bilateral Precaution Model
Objective: To be able to
use the Bilateral
Precaution Model to
assess the efficiency of
different liability rules.
39
D. The Bilateral Precaution Model
Injurer’s Private Costs:
𝑃𝐶𝐼 = 𝑤𝐼 𝑥𝐼
Victim’s Private Costs:
𝑃𝐶𝑉 = 𝑤𝑉 𝑥𝑉 + 𝑝 𝑥𝐼 , 𝑥𝑉 𝐴
Expected Social Cost:
𝐸 𝑆𝐶 = 𝑤𝐼 𝑥𝐼 + 𝑤𝑉 𝑥𝑉 + 𝑝 𝑥𝐼 , 𝑥𝑉 𝐴
40
D. The Bilateral Precaution Model
No Liability Rule:
𝑥𝐼 = 0
Victim’s Problem
min 𝑃𝐶𝑉 = 𝑤𝑉 𝑥𝑉 + 𝑝 0, 𝑥𝑉 𝐴
𝑥𝑉
 Victim takes efficient precaution
 Injurer takes no precaution
41
Will a Strict Liability Rule result in efficient
levels of precaution from both the injurer and the
victim? Explain.
42
D. The Bilateral Precaution Model
Strict Liability Rule:
𝑥𝐼 = 𝑥𝐼∗
Victim’s Problem
min 𝑃𝐶𝑉 = 𝑤𝑉 𝑥𝑉
𝑥𝑉
 Injurer takes efficient precaution
 Victim takes no precaution
43
Will a Simple Negligence Rule result in efficient
levels of precaution from both the injurer and the
victim? Explain.
44
D. The Bilateral Precaution Model
Simple Negligence Rule:
𝑥𝐼 = 𝑥
Victim’s Problem
min 𝑃𝐶𝑉 = 𝑤𝑉 𝑥𝑉 + 𝑝 𝑥𝐼∗ , 𝑥𝑉 𝐴
𝑥𝑉
 Injurer takes efficient precaution
 Victim takes efficient precaution
45
D. The Bilateral Precaution Model
Defence of Contributory Negligence:
 Victim shares liability if victim fails to meet legal standard of care
Negligence Rule:
Injurer still has incentive to meet standard
Victim still has incentive to meet standard
Strict Liability Rule: Injurer still has incentive to be efficient
Victim has incentive to meet standard
46
D. The Bilateral Precaution Model
Conclusion:
With perfect compensation and standards of care
equal to the efficient levels of precaution, Strict
Liability with Contributory Negligence and
Negligence with or without Contributory Negligence
result in efficient levels of precaution.
Strict Liability: Injurer bears residual liability
Negligence:
Victim bears residual liability
47
D. The Bilateral Precaution Model – Activity Levels
The probability of an accident is affected by:
- Level of precaution
- How much one engages in the risky activity
48
Under a Negligence Rule, who has incentive to be
efficient in their activity level – the injurer, the
victim, or both? Explain.
What about under a Strict Liability Rule?
49
How can we use this in choosing between Strict
Liability with Contributory Negligence and
Negligence?
50
D. The Bilateral Precaution Model – Activity Levels
Legal Rule
No Liability
Strict Liability
Simple Negligence
Negligence with
Contributory Negligence
Strict Liability with
Contributory Negligence
Precaution
Victim
Injurer
Yes
Zero
Zero
Yes
Yes
Yes
Activity Level
Victim
Injurer
Yes
No
No
Yes
Yes
No
Yes
Yes
Yes
No
Yes
Yes
No
Yes
51
E. Sequential Care Accidents
Objective: To be able
to assess the efficiency
of different liability
rules in sequential
move scenarios.
52
What are some examples of real-life situations in
which simultaneous choices is realistic?
53
E. Sequential Care Accidents
Sequential Game:
First mover chooses level of precaution
Second mover observes first mover’s choice
Second mover chooses level of precaution
 Efficiency requires second mover choose efficient
precaution, even if first mover doesn’t
54
What are some examples of real-life sequential
care scenarios?
55
E. Sequential Care Accidents
Injurer moves first – fails to take efficient precaution
Which liability rule(s) gives the victim incentive to take efficient
precaution? Explain.
56
E. Sequential Care Accidents
Victim moves first – fails to take efficient precaution
Which liability rule(s) gives the injurer incentive to take efficient
precaution? Explain.
57
What liability rule should we use if we cannot
predict who will move first? Explain.
58
F. Setting the Legal Standard
Objective: To be able
to assess the efficient
level of precaution in
practice.
59
F. Setting the Legal Standard
Legal Standard of Care:
Economics:
What would a reasonable person, aware
of all relevant circumstances, do in that
situation?
Reasonable = Efficient
60
F. Setting the Legal Standard
Learned Hand Formula (United States vs Carroll Towing Co)
Efficiency requires:
𝑤 = 𝑝′ 𝑥 𝐴
If:
𝑤 < 𝑝′ 𝑥 𝐴
Then:
Precaution was insufficient
61
What are the potential problems?
62
F. Setting the Legal Standard
How does one calculate expected accident costs?
- Government studies of costs and benefits
- Case by case analysis in the courts
- Industry best practices
63
G. Errors, Vagueness, and Uncertainty
Objective: To be able to
assess efficiency outcomes
of negligence law under
informational constraints.
64
G. Errors, Vagueness, and Uncertainty
Suppose the court consistently gets damages wrong.
Will this affect the injurer’s incentives, the victim’s incentives, or
both? Explain.
65
G. Errors, Vagueness, and Uncertainty
Incorrect Damages under Strict Liability
Injurer’s Problem:
min 𝑃𝐶𝐼 = 𝑤𝑥 + 𝑝 𝑥 𝐷
𝑥
𝐷 = 𝑑𝑎𝑚𝑎𝑔𝑒𝑠 𝑎𝑤𝑎𝑟𝑑
Injurer chooses x such that:
𝑤 = 𝑝′ 𝑥 𝐷
66
G. Errors, Vagueness, and Uncertainty
Incorrect Damages under Strict Liability
𝑤 = 𝑝′ 𝑥 𝐷
Suppose the court makes random errors in setting damages - i.e.,
sometimes it finds D > A, other times it finds D < A.
How would this affect the injurer’s incentives to take precaution?
67
G. Errors, Vagueness, and Uncertainty
Incorrect Damages under Strict Liability
𝑤 = 𝑝′ 𝑥 𝐷
Suppose the court consistently sets damages too low – D < A.
How would this affect the injurer’s incentives to take precaution?
68
G. Errors, Vagueness, and Uncertainty
Incorrect Damages under Strict Liability
𝑤 = 𝑝′ 𝑥 𝐷
Suppose the court consistently sets damages too high – D > A.
How would this affect the injurer’s incentives to take precaution?
69
G. Errors, Vagueness, and Uncertainty
Incorrect Damages under Negligence
Injurer’s Problem:
min 𝑃𝐶𝐼 = 𝑤𝑥 + 𝑝 𝑥 𝐷 𝑖𝑓 𝑥 < 𝑥
𝑥
𝑤𝑥
𝑖𝑓 𝑥 ≥ 𝑥
Injurer chooses
𝑥=𝑥
70
G. Errors, Vagueness, and Uncertainty
Incorrect fault under Strict Liability
Suppose the court erroneously finds lack of causation.
How would this affect the injurer’s incentives to take precaution?
71
G. Errors, Vagueness, and Uncertainty
Incorrect fault under Negligence
Suppose the court erroneously finds lack of causation.
How would this affect the injurer’s incentives to take precaution?
72
G. Errors, Vagueness, and Uncertainty
Injurer Errors
Suppose the injurer makes errors in predicting:
- Damages
- Probability of liability
How would this affect the injurer’s incentives to take precaution?
73
G. Errors, Vagueness, and Uncertainty
Errors in the Standard of Care
Suppose
𝑥 ≠ 𝑥∗
How would this affect the injurer’s incentives to take precaution?
74
G. Errors, Vagueness, and Uncertainty
Errors in the Standard of Care
Under a Negligence Rule, the injurer is motivated to avoid liability
 Precaution will equal the legal standard, whatever it is
75
G. Errors, Vagueness, and Uncertainty
Vague Standard of Care
𝑥 ~ 𝑑𝑖𝑠𝑡(𝑥 ∗ , 𝜎 2 )
How would this affect the injurer’s incentives to take precaution?
76
G. Errors, Vagueness, and Uncertainty
Liability Rule
Strict Liability
Negligence
Court’s Error
Injurer’s Error
Effect on Injurer
Excessive damages
Overestimates damages
Excessive precaution
Insufficient damages
Underestimates damages
Insufficient precaution
Random error in damages
Random error in damages
None
Excessive damages
Overestimates damages
None
Insufficient damages
Underestimates damages
None
Random error in damages
Random error in damages
None
Excessive legal standard
Overestimates legal
standard
Excessive precaution
Insufficient legal standard
Underestimates legal
standard
Insufficient precaution
Random error in legal
standard
Random error in legal
standard
Excessive precaution
77
H. Administrative Costs
Objective: To be able
to analyze the impact
of administrative costs
on the efficiency of
liability rules.
78
What would administrative costs be like with a
No Liability Rule?
79
How would administrative costs compare under a
Negligence Rule vs Strict Liability Rule?
80
H. Administrative Costs
• The necessity of proving breach of the standard of care increases
administrative costs in negligence
• Fewer cases in which harm is reallocated decreases
administrative costs in negligence
81
H. Administrative Costs
Consider:
- Rule simplicity
- Rule breadth
Wholesale Rules
Simple rules
Broad rules
Lower administrative costs
Distorted incentives
Case-by-Case
Complex rules
Narrow rules
Higher administrative costs
Accurate incentives
82
Which type of rule is more justifiable?
83
REVIEW
84
Describe duty of care, harm, and causation in each of the following
situations:
(a) Motorists driving on crossing streets come to an intersection
with a stop light and collide.
(b)The escalator in a store rips a customer’s pant leg to shreds.
(c) A visitor to the zoo climbs over a fence into the tiger pen and
gets killed.
85
Consider a barge owner who is deciding whether to post an attendant
on his barge to make sure that it remains properly moored to the pier.
Damages if it comes loose are $400. The following table gives the total
cost of hiring the attendant and the probability of an accident:
No Attendant
Attendant during day
only
Attendant for 24 hours
Cost of Care
$0
Probability of Harm
0.25
$50
0.10
$94
0
(a) What is the efficient outcome?
(b) If the court underestimates damages to be $300, would the court
find the barge owner negligent for failing to post an attendant?
86
Explain whether a rule of strict liability or simple negligence is
preferred in each of the following situations:
(a) The court makes errors in measuring the level of damages from
an accident.
(b) The court makes errors in measuring the injurer’s care level.
(c) The victim’s care is an important determinant of accident risk.
(d) The injurer’s activity level is an important determinant of
accident risk.
87