FE486A – Law and Economics Exam 2
Professor Schmitt
Spring 2014
Last 4 #’s of Alpha _________________________________________________________
Problem 1 (6 points). Read the following article from NewsDaily.com:
Boy's death from infected rat spurs suit vs. Petco WEDNESDAY FEB 26, 2014 | JULIE
WATSON FOR THE
ASSOCIATED PRESS
SAN DIEGO (AP) — The death of a 10-year-old San Diego boy from a bacterial infection he
reportedly got from his pet rat prompted his family to sue retailer Petco, saying they want to raise
awareness among parents.
Attorney John Gomez told The Associated Press on Tuesday that his firm filed the lawsuit Monday in
San Diego County seeking an unspecified amount for the suffering endured by the Pankey family,
whose son, Aidan, died June 12, 2013, hours after he was rushed to the hospital with severe stomach
pains.
The San Diego County medical examiner's office ruled that the cause of death was streptobacillus
moniliformis infection, commonly known as rat-bite fever, after exposure to an infected rat.
Gomez said the Pankey family was not giving interviews, but they are devastated by the death.
"It's a means to ensure this doesn't happen again," Gomez said of the lawsuit. "Apparently there was
some breakdown in procedures. They want tighter controls."
According to the lawsuit, the rat appeared safe. But the lawsuit says Petco should have known about
the rodent's health and did not adequately test for the disease. It also says that negligence led to the
boy's death, which has caused his parents, Andrew Pankey and Vanessa Sauer, emotional and
economic hardship, and that the retailer did not post adequate warnings about the potential risks,
especially for children.
Petco Animal Supplies Inc. said it is "in the process of investigating these claims and will respond
appropriately when we have more information."
Meanwhile, the retailer in a statement expressed its condolences.
"We are deeply saddened by the Pankey family's tragic loss," Petco said. "The health and safety of
people and pets is always a top priority, and we take the family's concerns very seriously."
The boy's grandmother purchased the male rat, which Aidan named Alex, because her only grandson
wanted a mate for his female rat, Gomez said. The boy took the rat home May 27, 2013, and woke up
the night of June 11 in severe pain with a fever and stomach problems. He was pale, lethargic and
could barely walk, according to the lawsuit. He died at 1:09 a.m. the next day.
"He was a bright, energetic, friendly, happy kid who actually had a prior rat, who was a female, and he
had this idea in his young head of having his female rat get married," Gomez said.
The lawsuit was not filed until now because attorneys were awaiting the lab results from the federal
Centers for Disease Control, which tested the rat to confirm it was infected, Gomez said. The agency
could not immediately confirm the results Tuesday.
According to the CDC, people can contract rat-bite fever from bites or scratches from infected
rodents, such as rats, mice and gerbils, or even just by handling an animal with the disease without a
bite or scratch. It can also be contracted by consuming food or drink contaminated with the bacteria. It
is not spread from person to person.
Antibiotics, such as penicillin, are highly effective at treating rat-bite fever, and it is rarely fatal,
according to the CDC.
The CDC says those at higher risk of contracting the illness are people with pet rats or who work with
rats in laboratories or pet stores, or live in rat-infested buildings. The agency recommends that people
who handle rats or clean their cages wear protective gloves, wash their hands regularly and avoid
touching their mouths with their hands after being in contact with rodents.
Petco also mentions preventative measures for rat-bite fever in information it posts online and
provides in stores. The company warns that all rats are potential carriers and that pregnant women,
children under the age of 5 and people with weakened immune systems should contact their doctor
before buying a rat and "should consider not having a rat as a pet."
Only about 200 cases of rat-bite fever had been documented in the U.S. as of 2004, according to the
Center for Food Security and Public Health at Iowa State University. Scientists believe the disease
may be underdiagnosed because it is hard to detect and responds to commonly used antibiotics. But
the number of cases, they say, may be increasing, especially among children, with the growing
popularity of rats as pets.
Copyright (2014) Associated Press. All rights reserved. This material may not be published, broadcast, rewritten, or
redistributed.
This article was distributed through the NewsCred Smartwire. Original article © The Associated Press 2014
Does this case meet the requirements of Tort? Explain why or why not. Use bullet points
(pay attention to point value and do not spend too much time on one problem) if you wish to
answer.
1) Harm: child died after buying a rate as a pet
2) Causation: but for the rat being sick when purchased by the kid, the kid would not
have died
3) Breach of duty: was reasonable care taken? What is appropriate level of
precaution? For the victim, he would have needed to:” wear protective gloves, wash
their hands regularly and avoid touching their mouths with their hands after being in contact
with rodents.” For Petco, they would need to test rats “Apparently there was some
breakdown in procedures. They want tighter controls” They could have tested the rat
and/or posted warnings.
Problem 2 (3 points)
Assume that Lily currently has wealth, W, equal to 50 ($50,000) and has 2 legs, L. Her current
utility is U Lily  WL  W . After some time, her job as a professional dancer resulted in her
inability to walk. The loss of both working legs results in her receiving workers compensation, so
her wealth falls to 20 ($20,000). Knowing that her injury is irreparable, what would result in
perfect compensation from her employer? Show graphically.
150
wealth
50
U1 = 150
20
U2 = 20
1
2
Legs
ULily = WL +W (with both legs) = 50*2 + 50 = U1
To be indifferent we need to figure out how much would perfectly compensate (X). Because
she has no use of her legs and wealth of 20 – she would need $130 to be perfectly
compensated. (Of which $30 is tangible and $100 in intangible).
Problem 3: (8 points)
Fill in the liability for the following two situations (8 points, 1 point each)
Negligence with Defense of Contributory
(Victim) Negligence:
Strict Liability with Defense of Comparative
Negligence:
Victim
Victim
Less
more
Injurer
less
more
V
V
I
V
Less
more
Injurer
less
more
V/I split
V
I
I
1. Under a No Liability rule
A. injurer’s precaution level against causing injury is efficient, and victim’s precaution
level to prevent injury is inefficient (too low).
B. injurer’s precaution level against causing injury is inefficient (too low), and
victim’s precaution level to prevent injury is efficient
C. injurer’s precaution level against causing injury is efficient, and victim’s precaution
level to prevent injury is inefficient (too high)
D. both injurer's and victim's precaution levels against injury are at the efficient level
2. Either, or both, neighbor A or neighbor B can buy a fence to keep neighbor A’s chickens
in neighbor A’s yard/out of neighbor B’s yard which reduce damage to neighbor B’s
yard. Which liability rule results in the efficient purchase of a fence?
A.
B.
C.
D.
Neighbor A is always liable for damage to neighbor B’s yard
Neighbor B is always liable for damage to its own yard
either A.) or B.) REDUNDANT PRECAUTION
none of the above
3. Under a Strict Liability rule
A.
B.
C.
D.
injurers causing torts take a level of Precaution below the efficient level
injurers causing torts take a level of Precaution above the efficient level
victims of torts take a level of Precaution below the efficient level
victims of torts take a level of Precaution above the efficient level
4. Under a Negligence Rule with Defense of Contributory (victim) Negligence
A. one party (victim or injurer) will become 100% liable for harm dependent on their
levels of precaution
B. parties split liability according to contribution to harm
C. the level of victim precaution will be below the efficient level
D. the level of injurer precaution will be below the efficient level
5. Suppose people are over-optimistic about driving skills and think the probability they
cause an accident is lower than the true probability. Given this,
A. mandatory automobile insurance which rises with an individual’s number of accidents
provides an incentive for efficient injurer precaution
B. brain surgery to connect missing right lobe synapses, or viewing car accident videos, may
correct the problem
C. simple negligence rules, given the minimum legal precaution level determining
liability is set at the efficient level, would result in the efficient level of injurer
precaution
D. punitive damages under a strict liability rule could mitigate otherwise inefficient (too
low) injurer precaution
6. The simple liability game is in a Nash Equilibrium when the injurer and the victim take
efficient care because:
A. A Pareto Efficient outcome is achieved.
B. Both players earn the same compensation.
C. There is no incentive for either party to chose a different level of precaution given
the precaution taken by the other party.
D. Both parties try to take the efficient level of precaution because if no one does then the
other party is found liable.