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

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

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? Economic Analysis of Tort Liability10

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

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

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

 A 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

There 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.)

“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

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. “

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

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

x = Amount of precaution p(x)A = Expected Accident costs $

x = Amount of precaution wx = precaution cost p(x)A = Expected Accident costs $

x = Amount of precaution wx = precaution cost p(x)A = Expected Accident costs Total Cost = p(x)A + wx $

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* $

Marginal Costs x = Amount of precaution Rate at which Accident costs decrease $

Marginal Costs x = Amount of precaution Marginal cost of precaution Rate at which Accident costs decrease w

Marginal Costs x = Amount of precaution Marginal cost of precaution Rate at which Accident costs decrease Minimum = Efficient amount of precaution x* w

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

Injurer is liable for all harm Precaution does not reduce or eliminate liability The opposite of strict liability is no liability

 Strict liability with perfect compensatory damages gives the victim no incentive to take precaution  No liability gives the injurer no incentive to take precaution

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

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

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

When 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.

Simple negligence: Injurer is liable only if precaution is less than due care standard; otherwise victim is liable Negligence 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

Total Costs x = Amount of precaution wx = precaution cost Expected Accident costs Total Costs Minimum = Efficient amount of precaution x* DCS

Total Costs x = Amount of precaution wx = precaution cost Expected Accident costs Total Costs Minimum = Efficient amount of precaution x* DCS

Total Costs x = Amount of precaution wx = precaution cost Expected Accident costs Total Costs Minimum = Efficient amount of precaution x* DCS

Total Costs x = Amount of precaution wx = precaution cost Expected Accident costs Total Costs Minimum = Efficient amount of precaution x* DCS

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

1. Simple negligence 2. Negligence with defense of contributory negligence 3. Comparative negligence 4. Strict liability with defense of contributory negligence

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.

With simple negligence the carnival operator is relieved of all liability as long as he adheres to the due care 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

Assume driver is only liable if he is negligent If he is not negligent, damages are not related to the number of trucks on the road The number of accidents is positively related to the number of trucks on the road Increased probability that you will be in an accident with a truck With 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.

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

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

“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

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

Errors in setting due care standard Errors in damages  Size of award  Holding injurer liable

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

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

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

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Firefighter rule Good Samaritan protection Public policy 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  Gross negligence and intentional harm is not ordinarily protected

Provides protection from ordinary negligence when providing emergency assistance  Medical professionals are not ordinarily protected There may be no general duty to render assistance

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

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 Findlaw: Ohio Social Host Law

Summary of Major Tort Liability Standards Components of Efficiency Implications for Equity Standard Provides Incentives for Efficiency in Transaction Costs Standard Injurer's Degree of Care? Scale of Injurer's Activities? Victim's Degree of Care? Scale of Victim's Activities? Distribution of Risk? Strict LiabilityYes No No (Overinsures nonpecuniary losses) HighCompensates all victims; bundles unwanted insurance for nonpecuniary losses into product prices Strict Liability with Comparative Negligence Yes Depends on extent of reduction in compensation to negligent victims NoNo (Overinsures nonpecuniary losses) HighCompensates nonnegligent victims (partially compensates negligent victims); bundles unwanted insurance for nonpecuniary losses into product prices NegligenceDepends on the efficiency of the legal standard of due care NoYes No (Overinsures nonpecuniary losses, though less so than strict liability since nonnegligent injuries are not compensated) HighNonnegligent injurers not held liable; some victims uncompensated Source: Congressional Budget Office.