Economics of Tort Law
CBO Study. The Economics of U.S. Tort Liability: A Primer, October 2003
U.S. Department of Justice, Civil Justice Survey of State Courts,
2001
Tort Law
• 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
Tort liability
A court imposed obligation
on the tortfeasor to pay for
a victim’s losses.
An efficient system would minimize
these elements of cost
•
•
•
•
Cost of injuries
Cost of precaution
Cost of administration
Indirect costs to economy
An efficient system would
internalize externalities
Traditional tort liability requires
three elements
1. 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
Breach of duty
• Strict liability rule - only
harm and cause are
required for a tort
– any harm is a breach of due
care
• Negligence rules require a
minimum duty of care
Duty of care
 A legal standard
prescribing the minimum
acceptable level of
precaution
– Violation of the due care
standard represents
negligence
– Due care standard is based
upon a reasonable person
Harm
• There typically must be an
actual harm.
– Liability law does not compensate
for exposure to risk
• 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.)
Cause
• “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
The economic purpose of tort law
is to minimize the social cost of
accidents.
We will assume only cost of injury
and cost of precaution
x = precaution
w = cost of a unit of precaution
A = monetary value of the harm
p(x) = probability of harm
Minimize social cost
SC  wx  p ( x) A
w   p( x) A
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
Tort law incentives
• Strict liability with perfect
compensatory damages
gives the victim no
incentive to take
precaution
• No liability gives the injurer
no incentive to take
precaution
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 and
injurer will be found liable for
all harms he caused
Bilateral precaution
When bilateral precaution is
possible neither rule causes
both to take the optimal
level of precaution
Negligence standard
• Negligence rule with
perfect compensation and
the legal standard set to
the efficient level of care
gives the injurer incentives
for efficient precaution.
• Victim responds as if there
is no liability, therefore
victim has efficient
incentive for precaution
 Negligence rules give the
victim and the injurer
efficient incentives for
precaution
 Negligence rule is
preferred when there is
bilateral precaution
Negligence rules
• Simple negligence
• Negligence with defense
of contributory negligence
• Comparative negligence
• Strict liability with defense
of contributory negligence
• Simple negligence
– Injurer at fault => injurer liable
– Injurer faultless => injurer not
liable
• Negligence with defense of
contributory negligence
– Injurer at fault and victim
faultless => injurer liable
– Injurer faultless or victim at
fault => injurer not liable
• Comparative negligence
– Injurer at fault and victim
faultless => injurer bears 100%
– Injurer faultless and victim at
fault => victim bears 100%
– Injurer at fault and victim at
fault => bear cost in
proportion to negligence
• Strict liability with defense
of contributory negligence
– Victim at fault => injurer not
liable
– Victim faultless => Injurer
liable
Activity vs. Precaution
• With simple negligence the
carnival operator is relieved of
all liability as long as he adheres
to the due standard.
• However, even with inspections,
mishaps can occur, passengers
can be injured.
• There is no incentive to limit the
passengers on the ride or the
number of carnivals.
Activity vs. Precaution
• Passengers, however, may take
this into consideration.
• This may limit the number of
passengers (the activity level.)
When they do get on the ride
they might also take some
precaution. They will make sure
restraints are functioning and
will keep their hands and feet
in.
Activity levels
• 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
No single rule can create efficient
incentives for both bilateral
precaution and bilateral activity
levels.
The Hand Rule for identifying
efficient precaution
• 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
The Hand Rule for identifying
efficient precaution
•
•
“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.”
… it in algebraic terms: if the probability be
called P; the injury, L; and the burden, B;
liability depends upon whether B is less than
L multiplied by P: i.e., whether B less than PL.
The Hand Rule for identifying
efficient precaution
Optimal precaution
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
Potential errors
• Errors in setting due care
standard
• Errors in damage award
Errors – Strict Liability
• Errors in setting damages
under a rule of strict liability
cause the injurer’s
precaution to respond in
the same direction as the
error
• Errors in failing to hold
injurers liable under a rule
of strict liability causes
them to take less
precaution
Errors - Negligence
• Injurer’s negligence does
not respond to modest
errors in setting damages
under the negligence rule
• Injurer’s precaution
responds exactly to court
errors in setting the legal
standard under a
negligence rule
Exceptions in tort liability
• Firefighter rule
• Good Samaritan
protection
• Public policy rule
Firefighter 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
Good Samaritan protection
• Provides protection from
ordinary negligence when
providing emergency
assistance
• There may be no general
duty to render assistance
Public policy rule
• 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
Alcohol related liabilities
• 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
You’ll shoot your eye out
Swix v Daisy Manufacturing,
US District Court 2004
373 F.3d 678
Swix v Daisy Manufacturing
• After losing the use of his eye, Aaron,
a minor, and his parents brought a
product liability action against the
manufacturer of the air rifle that his 11year-old friend used to shoot him. The
case claimed that the air rifle was
defectively designed.
• The lower court dismissed the claim a
gun is a “simple tool” under Michigan
law and the dangers of pointing it at
another person are “open and
obvious.”
– There is no need to warn of a danger
where the danger is obvious
– The product itself telegraphs the
precise warnings the plaintiffs claim is
lacking
Swix v Daisy Manufacturing
• The appeals court found that gun
was a simple tool. However, the lower
court failed to apply the reasonable
child standard.
• A manufacturer who bypasses adults,
upon whom the law ordinarily places
responsibility, and markets a simple,
but dangerous, tool directly to
children may not avoid liability on the
ground that the child should have
known better
• The fact that Daisy intended that its air
rifle be used under the direct
supervision of an adult and that Swix’s
grandfather had the same rule does
not alter the “reasonable child
standard”