FE486A: Law and Economics
Homework 3
Due March 21st
1. (10 points) Describe the three elements of tort when a motorist driving on crossing
streets comes to an intersection with a stop light and collide.
The three elements of a tort are: harm, cause, and breach of a duty of care. Each motorist
has a duty of care to drive within the rules of the road and the prevailing conditions. If one
of them fails to stop at a stop sign and an accident results, then that failure to stop is a (if
not “the”) cause of the accident. And whatever injuries the victim suffers constitute the
harm.
2. (10 points) Assume that you park your car in a legal parking space on a corner, and a
driver who comes around the corner too fast rams the bumper of his truck into your car,
damaging your car but not his truck. A rule of no liability gives the driver of the truck the
same incentives to avoid such accidents as the incentives given to you to park your car in
a safe place under a rule of strict liability with perfect compensation. Explain why.
The rule of strict liability with perfectly compensatory damages gives the victim no
incentive to avoid the harm. On the other hand, the rule of no liability gives the injurer no
incentive to avoid the harm.
3. (10 points) Suppose that a person who is burned in an accident suffers intense pain for 1
week and then fully recovers. What does “perfect compensation” mean in principle as
applied to the burn? Why do you expect actual compensation to be imperfect?
The court would need to decide what amount of money would perfectly compensate the
burn victim for her one week of pain. This is extremely difficult to calculate, thus
illustrating the problem. Do you have any idea how much money you would accept in
exchange for suffering one week of intense pain? We doubt it.
4. (20 points) Assume that Bob currently has wealth, W, equal to 100 ($100,000) and has 2
hands, H. His current utility is U  2WH  20 H . After some time, his job as a meat
grinder resulted in the loss of his left hand. This injury results in workers compensation,
so his wealth falls to 50 ($50,000). Knowing that his injury is irreparable, what would
result in perfect compensation from his employer?
bob
2
U = 2*100*22+20*2=840
To be indifferent we need to figure out how much would perfectly compensate (X)
U = 2*X*12+20*1 = 840  2X = 820 or X = 410. Since he has $50, he needs $360 for perfect
compensation.
5. (10 points) Justify that the simple liability game is in a Nash Equilibrium when the
injurer and the victim take efficient care.
Once each party is taking efficient care, there is no incentive for either party to change the
amount of care he is taking.
6. (25 points) A swimming pool owner drains it for repairs but keeps the pool gate
unlocked and posts no signs of hazard. A drunk victim at the pool owner’s summer party
tries to cool off and does not check pool water level before diving in empty pool and
breaks neck (literally a “tort” or “twisted” neck). Perfect Compensatory Damages are $5
million. Under which liability rule(s) would the pool owner NOT be 100% liable for
damages?
a) Strict Liability - No. The pool owner is 100% liable under Strict Liability.
b) Simple Negligence - No. The pool owner is 100% liable under Simple Negligence
since level of precaution (e.g. minor cost of posting sign or locking gate) is deficient.
c) Negligence with Defense of Contributory Negligence - Pool owner pays nothing since
victim does not take precaution despite pool owner not taking precaution.
d) Comparative Negligence - Liability split dependent on degree of injurer and victim
negligence.
7. (15 points) A landlord or a tenant (renter) can purchase smoke detectors which limit
chance of harm (being tenant’s property being damage by fire). Which liability rule
results in the efficient level of smoke detectors being purchased?
a) No Liability (tenant always liable for damage to own property by fire)
b) Strict Liability (landlord always liable for damage to tenant property by fire)
Redundant precaution example. Under No Liability, victim is fully liable for harm and
purchases the efficient number of smoke detectors matching up marginal cost and benefit;
and under Strict Liability, the landlord does the same since he or she is liable for renter
harm and minimizes expected costs = smoke detectors plus expected victim harm since
expected victim harm is a liability. (This result, efficiency, is somewhat an application of
the Coase theorem with no transaction costs.)