Economics of Tort Law

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  • 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 LawTort injury to person or propertyWe 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 victims losses.

  • An efficient system would minimize these elements of costCost of injuriesCost of precautionCost of administrationIndirect costs to economy

    An efficient system would internalize externalities

  • Traditional tort liability requires three elementsBreach of Duty - The defendants act or failure to act must constitute the breach of a duty owed to the plaintiff by the defendantHarm - The plaintiff must have suffered a harm Cause - The defendants act or failure to act must cause the harm

  • Breach of dutyStrict liability rule - only harm and cause are required for a tort any harm is a breach of due careNegligence rules require a minimum duty of care

  • Duty of careA legal standard prescribing the minimum acceptable level of precautionViolation of the due care standard represents negligenceDue care standard is based upon a reasonable person

  • HarmThere typically must be an actual harm.Liability law does not compensate for exposure to riskPerfect 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.)

  • CauseBut for test (cause in fact)Problem when there are multiple causes (ambiguous causation)Ex., Medical malpractice casesProximity in the law is imprecise But for test does not distinguish between proximate causes and remote causesProximate 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

  • 5.psd

  • PrecautionUnilateral precautionOnly the injurer or only the victim can influence the probability or severity of injuryBilateral precautionBoth the injurer and the victim can influence the probability or severity of injury

  • Tort law incentivesStrict liability with perfect compensatory damages gives the victim no incentive to take precautionNo liability gives the injurer no incentive to take precaution

  • Strict liabilityAppropriate when only unilateral precaution by the injurer is possibleInjurer has incentive to minimize total social costAssumes costs can be accurately measured and injurer will be found liable for all harms he caused

  • Bilateral precautionWhen bilateral precaution is possible neither rule causes both to take the optimal level of precaution

  • Negligence standardNegligence 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

  • 8.psd

  • Negligence rules give the victim and the injurer efficient incentives for precautionNegligence rule is preferred when there is bilateral precaution

  • Negligence rulesSimple negligenceNegligence with defense of contributory negligenceComparative negligenceStrict liability with defense of contributory negligence

  • Simple negligenceInjurer at fault => injurer liableInjurer faultless => injurer not liableNegligence with defense of contributory negligenceInjurer at fault and victim faultless => injurer liableInjurer faultless or victim at fault => injurer not liable

  • Comparative negligenceInjurer 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 negligenceStrict liability with defense of contributory negligenceVictim at fault => injurer not liableVictim faultless => Injurer liable

  • Activity vs. PrecautionWith 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. PrecautionPassengers, 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 levelsUnder 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.

  • 6.psd

  • The Hand Rule for identifying efficient precautionUnited States v. Carroll Towing Co., (2d Cir. 1947)Defendant hired to move bargeThe mooring lines were not correctly adjustedA barge broke loose and sankThe tug owner argued that barge owner was also negligent because there was no bargee

  • The Hand Rule for identifying efficient precautionSince 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 shewill 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 precautionOptimal precaution

    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 errorsErrors in setting due care standardErrors in damage award

  • Errors Strict LiabilityErrors in setting damages under a rule of strict liability cause the injurers precaution to respond in the same direction as the errorErrors in failing to hold injurers liable under a rule of strict liability causes them to take less precaution

  • Errors - NegligenceInjurers negligence does not respond to modest errors in setting damages under the negligence ruleInjurers precaution responds exactly to court errors in setting the legal standard under a negligence rule

  • Exceptions in tort liabilityFirefighter ruleGood Samaritan protectionPublic policy rule

  • Firefighter rulePrecludes 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 riskMay 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 ruleDamages would run counter to public policy goalsA victim should not benefit from their own criminal behaviorA bomb maker sued those who sold him the gunpowderA suit by a burglar against the homeowner for faulty stairs

  • Alcohol related liabilitiesAn injured person can sue those who contributed to the injurers intoxicationDram shop lawsSocial host lawsThere was a special duty of care because the injurer was invited to drink

  • Youll shoot your eye out

    Swix v Daisy Manufacturing, US District Court 2004373 F.3d 678

  • Swix v Daisy ManufacturingAfter 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 obviousThe product itself telegraphs the precise warnings the plaintiffs claim is lacking

  • Swix v Daisy ManufacturingThe 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 betterThe fact that Daisy intended that its air rifle be used under the direct supervision of an adult and that Swixs grandfather had the same rule does not alter the reasonab