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 elements1. 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

AxpwxSC )(

Axpw )(

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

Axpw )(Optimal precaution

Axpw )(

If the marginal cost of precaution is less than the marginal benefit from precaution, the party is negligent.

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 2004373 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 11-year-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”