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

A court imposed obligation on the tortfeasor to pay
for a victim’s losses.
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




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
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
2. Harm - The plaintiff must have suffered a harm
3. Cause - The defendant’s act or failure to act must
cause the harm
1.

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

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

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.)

“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
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. “





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
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
SC  wx  p ( x) A
SC
 w  p( x) A  0
x
w   p( x) A
p( x)  0, p( x)  0
marginal cost of precaution  marginal cost of expected harm
$
p(x)A = Expected Accident costs
x = Amount of precaution
$
wx = precaution cost
p(x)A = Expected Accident costs
x = Amount of precaution
$
Total Cost = p(x)A + wx
wx = precaution cost
p(x)A = Expected Accident costs
x = Amount of precaution
$
Minimum = Efficient amount of precaution
Total Cost = p(x)A + wx
wx = precaution cost
p(x)A = Expected Accident costs
x*
x = Amount of precaution
Marginal Costs
$
Rate at which Accident costs
decrease
x = Amount of precaution
Marginal Costs
w
Marginal cost of precaution
Rate at which Accident costs
decrease
x = Amount of precaution
Marginal Costs
Minimum = Efficient amount of precaution
w
Marginal cost of precaution
Rate at which Accident costs
decrease
x*
x = Amount of 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
Injurer is liable for all harm
 Precaution does not reduce or eliminate liability
 The opposite of strict liability is no liability

 Strict liability with perfect
compensatory damages gives the
victim no incentive to take
precaution
 No liability gives the injurer no
incentive to take precaution
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

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
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
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 .

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
Total Costs
Minimum = Efficient amount of precaution
DCS
Total Costs
wx = precaution cost
Expected Accident costs
x*
x = Amount of precaution
Total Costs
Minimum = Efficient amount of precaution
DCS
Total Costs
wx = precaution cost
Expected Accident costs
x*
x = Amount of precaution
Total Costs
Minimum = Efficient amount of precaution
DCS
Total Costs
wx = precaution cost
Expected Accident costs
x*
x = Amount of precaution
Total Costs
Minimum = Efficient amount of precaution
DCS
Total Costs
wx = precaution cost
Expected Accident costs
x*
x = Amount of precaution
Negligence rules give the victim and the injurer
efficient incentives for precaution
 Negligence rule is preferred when there is bilateral
precaution

Simple negligence
2. Negligence with defense of contributory
negligence
3. Comparative negligence
4. Strict liability with defense of contributory
negligence
1.

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.
With simple negligence the carnival operator is
relieved of all liability as long as he adheres to the due
care 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
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.

Under a negligence rule the marginal risk of harm to others
by engaging in the activity is externalized. Under strict
liability, the social cost of accidents is internalized. Induces
efficient precaution and efficient activity by injurers.
 The party who escapes bearing the cost has an incentive for
an inefficient activity level.
 Efficiency requires choosing a liability rule so that the party
whose activity level most affects accidents bears the
residual cost of accidental harm.
 Liability rules cannot provide an efficient incentive for
bilateral activity levels


United States v. Carroll Towing Co., (2d Cir. 1947)




Defendant hired to move barge
The mooring lines were not correctly adjusted
A barge broke loose and sank
The tug owner argued that barge owner was also negligent
because there was no bargee
“Since there are occasions when every vessel will break from her
moorings, and since, if she does, she becomes a menace to
those about her; the owner's duty, as in other similar
situations, to provide against resulting injuries is a function of
three variables:




(1) The probability that she will break away;
(2) the gravity of the resulting injury, if she does;
(3) the burden of adequate precautions.”
… in algebraic terms:
if the probability is P; the injury, L; and the burden (cost), B;
liability depends upon whether B is less than L multiplied by P:
i.e., whether B less than PL. If B<PL then party is negligent
If the party’s cost of preventing accidents (burden, B) is less than the expected
losses from accidents (PL) that party should be deemed negligent. Otherwise it is
better for accidents to occur.
•
In this case the barge owner was liable
Optimal precaution in marginal terms
w   p( x) A
If the marginal cost of precaution is less than
the marginal benefit from precaution, the
party is negligent.
w   p( x) A
When B < PL, the party is negligent
 Errors in setting due care standard
 Errors in damages
 Size of award
 Holding injurer liable
Errors in setting DCS not relevant
 Errors in size of liability award and holding injurers
liable

 Errors in setting damages under a rule of strict liability
causes the injurer’s precaution to respond in the same
direction as the error
 Excessive awards create excessive precaution
 Errors in failing to hold injurers liable under a rule of strict
liability causes them to take less precaution
 Ex., linking cancers to environmental contamination
Overestimating damages causes more precaution
Failing to hold injurers liable produces less precaution

Errors in monetary damages
 Injurer’s negligence does not respond to modest errors in
setting damages under the negligence rule

Errors in DCS
 Injurer’s precaution responds exactly to court errors in setting
the legal standard under a negligence rule
Errors in Due Care Standard
Errors in due care standard affect precaution
Errors in setting Damages
Small errors in damages does not influence precaution
or
Firefighter rule
 Good Samaritan protection
 Public policy rule

Precludes a firefighter from recovering from one
whose negligence causes or contributes to a fire that
in turn causes injury or death to the firefighter

 There is an assumption of risk
 May be limited to premises liability and ordinary negligence
 Gross negligence and intentional harm is not ordinarily
protected
Provides protection from ordinary negligence when
providing emergency assistance

 Medical professionals are not ordinarily protected

There may be no general duty to render assistance
Damages would run counter to public policy goals
 A victim should not benefit from their own criminal
behavior

 A bomb maker sued those who sold him the gunpowder
 A suit by a burglar against the homeowner for faulty stairs
An injured person can sue those who contributed to
the injurer’s intoxication

 Dram shop laws
 Social host laws
There was a special duty of care because the injurer
was invited to drink
 Findlaw: Ohio Social Host Law

Summary of Major Tort Liability Standards
Components of Efficiency
Standard Provides Incentives for Efficiency in
Injurer's
Degree
of Care?
Yes
Scale of
Injurer's
Activities?
Yes
Victim's
Degree
of Care?
No
Strict Liability
with
Comparative
Negligence
Yes
Yes
Negligence
Depends on the No
efficiency of the
legal standard of
due care
Standard
Strict Liability
Source: Congressional Budget Office.
Scale of
Victim's
Activities?
No
Distribution
of Risk?
No (Overinsures
nonpecuniary
losses)
Transaction Implications
Costs
for Equity
High
Compensates all
victims; bundles
unwanted insurance for
nonpecuniary losses
into product prices
Depends on
No
extent of
reduction in
compensation to
negligent victims
No (Overinsures
nonpecuniary
losses)
High
Yes
No (Overinsures
High
nonpecuniary
losses, though less
so than strict
liability since
nonnegligent
injuries are not
compensated)
Yes
Compensates
nonnegligent victims
(partially compensates
negligent victims);
bundles unwanted
insurance for
nonpecuniary losses
into product prices
Nonnegligent injurers
not held liable; some
victims uncompensated