Economics of Tort Law

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

Bureau of Justice Statistics, 2005State Courts

Bureau of Justice Statistics, 2005 State Courts

Bureau of Justice Statistics, 2005

Bureau of Justice Statistics, 2005

Punitive Damage Awardsin Large Counties, 2001

Tort liability A court imposed obligation on the tortfeasor to pay for a victim’s losses.

Economic Analysis of Tort Liability 10

Why is there tort liability?

There are situations in which the transaction costs between potential injurers and potential victims are so high that they cannot bargain about liability prior to an accident.

Elements Breach of a preexisting duty of care No contract exists between the victim and the injurer

How can we affect pre-accident behavior when victim and injurer cannot assign liability by contract?

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 and provide incentives for efficient precaution and activity

Precaution is a function of the resources devoted to avoiding potential harm

Activity is a function of the volume or frequency of risky behavior

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

Element 1: Breach of duty

Two possible rules Strict liability rule - only harm and cause are required

for a tort any harm is a breach of due care

Negligence rule - requires a minimum duty of care

Duty of careA legal standard prescribing the minimum acceptable level of precaution

Violation of the due care standard represents negligence Under strict liability any harm violates due care standard

Due care standard is based upon a reasonable person

Element 2: HarmThere typically must be an actual harm.

Liability law does not compensate for exposure to risk A pollutant that reduces property values may result in an

actual harm, but the future risk of illness is not an actual harm

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.)

Element 3: 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

Palsgraph v. LIRR (NY 1938)

Plaintiff was standing on the platform when another passenger was having some difficulty boarding a train. While a LIRR guard helped him onto the train a package he was holding became dislodged and fell on the platform. The package contained fireworks which exploded. The explosion toppled a scale which struck the plaintiff“The conduct of the defendant's guard, if a wrong in its relation to the holder of the package, was not a wrong in its relation to the plaintiff, standing far away. Relatively to her it was not negligence at all. Nothing in the situation gave notice that the falling package had in it the potency of peril to persons thus removed. “

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 and provide incentives for efficient precaution and activity

Precaution is a function of the resources devoted to avoiding potential harm

Activity is a function of the volume or frequency of risky behavior

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 = unit of precaution w = cost of a unit of precaution A = monetary value of the harm p(x) = probability of harm

Minimize social cost

harm expected ofcost marginalprecaution ofcost marginal

0)(,0)(

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xpxp

Axpw

Axpwx

SC

AxpwxSC

Total Costs

x = Amount of precaution

p(x)A = Expected Accident costs

$

Total Costs

x = Amount of precaution

wx = precaution cost

p(x)A = Expected Accident costs

$

Total Costs

x = Amount of precaution

wx = precaution cost

p(x)A = Expected Accident costs

Total Cost = p(x)A + wx

$

Total Costs

x = Amount of precaution

wx = precaution cost

p(x)A = Expected Accident costs

Total Cost = p(x)A + wx

Minimum = Efficient amount of precaution

x*

$

The same issue with slopes

Marginal Costs

x = Amount of precaution

Rate at which Accident costs decrease

$

The same issue with slopes

Marginal Costs

x = Amount of precaution

Marginal cost of precaution

Rate at which Accident costs decrease

w

The same issue with slopes

Marginal Costs

x = Amount of precaution

Marginal cost of precaution

Rate at which Accident costs decrease

Minimum = Efficient amount of precaution

x*

w

PrecautionUnilateral 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

Strict LiabilityInjurer is liable for all harmPrecaution does not reduce or eliminate liabilityThe opposite of strict liability is no liability

Regulating Risk with a Liability Standard

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 liabilityAppropriate 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

Strict Liability versus No Liability

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 by injurer Injurer internalizes cost of injury

No liability Appropriate when only unilateral precaution by the

victim is possible Victim has incentive to minimize total social cost Assumes costs can be accurately measured by victim Victim internalizes cost of injury

Liability QuestionsUnilateral v. Bilateral Precaution Should airlines be strictly liable for

crashes? Should manufacturers be strictly

responsible for consumer injury?Defective products

Defect in design Defect in manufacture Defect in warning

Knives, Guns, Toasters

Bilateral precautionWhen bilateral precaution is possible neither strict liability or no liability causes both the victim and the injurer to take the optimal level of precaution.

The party who does not internalize the harm will not take adequate precaution.

Negligence may be the preferred rule when bilateral precaution is possible .

Negligence standardSimple negligence: Injurer is liable only if precaution is less than due care standard; otherwise victim is liableNegligence rule with perfect compensation and the legal standard set to the efficient level of care gives the injurer and victim incentives for efficient precaution.

Injurer has incentive to satisfy the due care standard Victim responds as if there is no liability, therefore

victim has efficient incentive for precaution

If the DCS is too low:

Total Costs

x = Amount of precaution

wx = precaution cost

Expected Accident costs

Total Costs

Minimum = Efficient amount of precaution

x*

DCS

If the DCS is high:

Total Costs

x = Amount of precaution

wx = precaution cost

Expected Accident costs

Total Costs

Minimum = Efficient amount of precaution

x*

DCS

If the DSC is high can get excessive caution:

Total Costs

x = Amount of precaution

wx = precaution cost

Expected Accident costs

Total Costs

Minimum = Efficient amount of precaution

x*

DCS

If the DCS is very high :

Total Costs

x = Amount of precaution

wx = precaution cost

Expected Accident costs

Total Costs

Minimum = Efficient amount of precaution

x*

DCS

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

Negligence rules1. Simple negligence2. Negligence with defense of contributory

negligence3. Comparative negligence4. Strict liability with defense of contributory

negligence

Activity versus Precaution

Activity - repeated risky behavior The more you drive, the more likely that you will

have an accident

Expected harm is a function of activity, harm and precaution

The more we engage in risky behaviors, the greater is the expected harm

The less precaution we take, the greater is the expected harm

Strict liability forces the injurer to internalize the harm related to activity, negligence does not.

Activity vs. Precaution

With simple negligence the carnival operator is relieved of all liability as long as he adheres to the duecare standard. Even with inspections, mishaps can occur, passengers can be injured. Riders put their set belts on because they can’t be sure the ride is safe. They will make sure restraints are functioning and will keep their hands and feet in. There is no incentive for the carnival operator to limit the passengers on the ride or the number of carnivals.Result

Optimal precaution, but too much activity With strict liability the number of riders would be less

but there would be no incentive for the riders to take due care

Trucking ExampleAssume driver is only liable if he is negligentIf he is not negligent, damages are not related to the number of trucks on the roadThe number of accidents is positively related to the number of trucks on the roadIncreased probability that you will be in an accident with a truckWith strict liability the trucking company has both an incentive for taking precaution and limiting mileage. The victim has no incentive for precaution or limiting activity.

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.

Identifying Efficient PrecautionThe Hand Rule

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.”

… in algebraic terms: if the probability is P; the injury, L; and the burden (cost), B; liability depends upon whether B is less than L multiplied by

P: i.e., whether B less than PL. If B<PL then party is negligent

If the party’s cost of preventing accidents (burden, B) is less than the expected losses from accidents (PL) that party should be deemed negligent. Otherwise it is better for accidents to occur.• In this case the barge owner was liable

Restatement of Hand Rule for identifying efficient precaution

Axpw )(

Axpw )(

Optimal precaution in marginal terms

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 by court

Errors in setting due care standardErrors in damages

Size of award Holding injurer liable

Errors related to Strict liability standard

Errors in setting DCS not relevant Errors in size of liability award and holding

injurers liable Errors in setting damages under a rule of strict

liability causes the injurer’s precaution to respond in the same direction as the error Excessive awards create excessive precaution

Errors in failing to hold injurers liable under a rule of strict liability causes them to take less precaution Ex., linking cancers to environmental contamination

Errors in Damages

Overestimating damages causes more precautionFailing to hold injurers liable produces less precaution

Errors related to Negligence standard

Errors in monetary damages Injurer’s negligence does not respond to modest

errors in setting damages under the negligence rule

Errors in DCS Injurer’s precaution responds exactly to court errors

in setting the legal standard under a negligence rule

Errors in Due Care Standard

Errors in due care standard affect precaution

Errors in setting Damages

Small errors in damages does not influence precaution

or

Possible exceptions in tort liability

Firefighter 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 risk May be limited to premises liability and ordinary

negligence Gross negligence and intentional harm is not

ordinarily protected

Good Samaritan LawProvides protection from ordinary negligence when providing emergency assistance

Medical professionals are not ordinarily protected

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 behavior

A bomb maker sued those who sold him the gunpowder

A suit by a burglar against the homeowner for faulty stairs

Extension to Third Party Liability -Alcohol related

liabilitiesAn 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 drinkFindlaw: Ohio Social Host Law

Summary of Major Tort Liability Standards  Components of Efficiency

Implicationsfor Equity

  Standard Provides Incentives for Efficiency in

Transaction CostsStandard

Injurer's Degreeof Care?

Scale ofInjurer'sActivities?

Victim'sDegreeof Care?

Scale ofVictim'sActivities?

Distributionof Risk?

Strict Liability Yes Yes No No No (Overinsuresnonpecuniarylosses)

High Compensates all victims; bundles unwanted insurance for nonpecuniary losses into product prices

Strict Liability with Comparative Negligence

Yes Yes Depends on extent of reduction in compensation to negligent victims

No No (Overinsuresnonpecuniary losses)

High Compensates nonnegligent victims (partially compensates negligent victims); bundles unwanted insurance for nonpecuniary losses into product prices

Negligence Depends on the efficiency of the legal standard of due care

No Yes Yes No (Overinsures nonpecuniary losses, though less so than strict liability since nonnegligent injuries are not compensated)

High Nonnegligent injurers not held liable; some victims uncompensated

Source: Congressional Budget Office.