Part D-II The Economics of Tort Law

1. Part D-II The Economics of Tort Law Tort_E2

2. Objectives • Negligence rules • Liability rules under bilateral precaution • Efficient tort law under bilateral precaution Tort_E2

3. Various Negligence Rules We have considered the Simple Negligence Rule: Potential injurer is negligent and strictly liable if xi < x’i Potential injurer is not negligent and not liable if xi => x’i There are other types of negligence rules. Tort_E2

4. Negligence with Defense of Contributory Negligence If the injurer is negligent (xi < x’i) and the victim is not negligent (xv => x’v) then the injurer is liable But if the injurer is negligent (xi < x’i) and the victim is also negligent (xv < x’v) then the injurer is not liable Of course if the injurer is not negligent (xi > x’i) then the injurer in not liable. Example: A victim running across an injurer’s slippery floor. Injurer liable under simple negligence but not liable under negligence with defense of contributory negligence. Tort_E2

5. Comparative Negligence If the injurer is negligent (xi < x’i) and victim is not negligent (xv => x’v) then the injurer is 100% liable If the injurer is not negligent (xi =>x’i) and victim is negligent (xv < x’v) then the victim is 100% liable If the injurer is negligent (xi < x’i) and victim is negligent (xv < x’v) then each bears the cost of harm in proportion to the degree of negligence (x’i - xi)/ x’i as compare to (x’v - xv)/ x’v Each shares the cost of harm in proportion to how negligent they were (ie. to what extent they failed to meet their respective standard of care). Tort_E2

6. Strict Liability with Defense of Contributory Negligence If the victim is negligent (xv < x’v) the injurer is not liable If the victim is not negligent (xv =>x’v) the injurer is liable This is often the rule applied to consumer products in the US. If the consumer is not negligent, then the manufacturer is strictly liable. If the consumer is negligent, then the manufacturer is not liable. Tort_E2

7. Amazing Result It can be shown (fairly easily) that with perfect compensation and with each standard of care set equal to the efficient level of care, all of the above forms of the negligence rule give the potential injurer and potential victim the incentives leading to their taking efficient level of precaution. Tort_E2

8. With perfect compensation and all legal standards of care set equal to the efficient level of precaution: Under every form of the negligence rule, one of the parties will escape bearing the cost of harm by meeting the legal standard. This party will take efficient precaution and avoid the cost of harm. The other party will, consequently, internalize the cost of the harm from accidents, which creates incentives for efficient precaution on their part. Recall, these rules developed over 300 or so years through the judgments of common law courts. They were not developed by economist seeking ‘efficiency’. Tort_E2

9. Redundant precaution Under bilateral precaution efficiency requires that both the potential injurer and the potential victim to take precaution. Redundant precaution is a risk situation in which both the potential injurer and the potential victim can take precaution but efficiency requires that only one of them to do so. Example: Both the tire manufacturer and vehicle manufacturer can check to ensure that the tires installed on new vehicles are properly manufactured. But it is less costly for the tire manufacturer to ensure that the tires are properly manufactured. Both the tire manufacturer and vehicle manufacturer can check to ensure that the tires installed on new vehicles are properly inflated. But it is less costly for the vehicle manufacturer to ensure that the tires are properly inflated. Tort_E2

10. The efficiency results for the alternative tort rules apply to redundant precaution that is continuous (eg. expenditure on quality control/driving speed). The efficiency results for the alternative tort rules might not apply to redundant precaution that is discontinuous (eg. on/off or yes/no). Example: Driver fastening seat belt – low cost Manufacturer designing a seat belt that fastens automatically – high cost Under simple negligence rule - manufacturer is liable Under negligence with defense of contributory negligence – manufacturer is not liable Tort_E2

11. Bilateral harm We have discussed risk situations in which only the ‘victim’ suffers harm: unilateral harm/unilateral precaution unilateral harm/bilateral precaution What about bilateral harm/bilateral precaution? Both parties are ‘victims’ and ‘injurers’ (eg. two cars collide). Such situations can be treated as two separate unilateral harm situations – all the nice results hold (we won’t prove this). Tort_E2

12. Activity level vs. precaution We have focussed on ensuring that the potential victim and potential injurer take the efficient amount of precaution when participating in activities that might cause accidents (drive safely). However, the probability of an accident is also determined by how much of the activity takes place (drive less). Do our various tort rules provide incentives for the ‘efficient’ activity level? Not always. Tort_E2

13. Activity level vs. precaution The general result is that the residual bearer of the cost of harm will have an incentive to select the efficient level of activity but the non-residual bearer of the cost of harm will not. Example: simple negligence rule - standard of care for a railroad is warning lights at all level crossings - once legal standard of care is met the railroad is no longer liable for accidents (1 train per day or 10 trains per day). Drivers and pedestrians are now the residual bearers of harm. Result - drivers and pedestrians will take efficient precaution (drive and walk safely) and they will also consider how frequently they use the level crossing (they will avoid the crossing whenever it is efficient to do so). But the railroad will not have an incentive to set the efficient activity level. Tort_E2

14. Activity level vs. precaution Which party will have the efficient incentives? PrecautionActivity level PV PI PV PI Legal rule No liab. yes nil yes no Strict liab. nil yes no yes Simple neg. yes yes yes no Neg. with cont. neg. yes yes yes no Strict liab. with cont. neg. yes yes no yes Comp. neg. yes yes yes no Tort_E2

15. Activity level vs. precaution Conclusion on tort rules and efficient precaution and activity levels: tort rules have their limits in so far as efficient is concerned They can provide efficient precaution incentives to both parties but in the case of bilateral precaution they can provide efficient activity level incentives to only one party Two policy targets (precaution and activity level) but only one policy tool (liability) – generally this does not work in any policy setting. Need another tool (taxes/regulation/etc.) Tort_E2