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Lecture

Textbook Notes - Chapter 8 An Economic Theory of Tort

by OC4

Department
Economics
Course Code
ECO320H1
Professor
Robert Barber

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Chapter 8: An Economic Theory of Tort Law (Textbook Notes)
- Economic essence of Tort Law: use of liability to internalize externalities created by high
transact costs
- Recovery:
o 1. Harm Suffered
o îXµ}(,uA(vv[l(]}
o 3. Breach of Duty (by defendant)
HARM:
- Liability laws =/= compensate for EXPOSURE to risk (e.g. outrage); only REALIZATION of risk
- }ÁvÁZ](]vs/d/D[lW>Ed/&&[µ]o]ǵÀ
- W(}uv]}vµvÀ]]u[](]}v}}]P]voµ]o]ǵÀ~h0)
o E.g. restores back to (Wo t W1) to compensate for lost wealth & restores sum equal to
cost of providing (Ho t H1) units of health
- /(]}µuPVÀ]]uv[}}v}uo,oÀoUhv}Ç]v]vP
W levels (IF VICTIM SEES A TRADEOFF BETWEEN W & H)
TANGIBLE LOSSES: e.g. medication costs, lost income etc.
/EdE'/>>K^^^WXPXu}]}voZuU]U^]vµ((]vP_
- Implementation of PERFECT COMPENSATION = difficult b/c hard to observe/measure valuation
of intangible loss
- LIABILITY DISPARITY t same court awards diff amounts of compensation to victims who suffered
the identical injury (causes: confusion over intangible damages)
o Across countries
o Reduction = increased fairness and efficiency
CAUSE:
- Even though there is a WRONG and DAMAGE, without CAUSE, no liability
- Differentiates tort from morality (e.g. 2 hunters firing, but only one killing t both are MORALLY
wrong, but only the one who actually CAUSED the harm is liable)
^h^-IN-&d_t measured by the ^µ-for-_ (if no, YES CAUSE; if yes, NO CAUSE)
Problems with the BFT:
- e.g. multiple harms t useless and misleading (too many factors)
- e.g. when applied to SEQUENCE of events that precede and injury t allows distant causes to
have the same weight as proximate causes t does not discriminate between proximate cause
and remote cause (e.g. being born)
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[Multiple causes can be measured by regression analysis (all variables with positive coefficients =
causes, the largest coefficient = most substantial cause)]
PROXIMATE CAUSE t u}(PV^,}Áo}uµZ}vv]}v(}]µoµ}
Z}Æ]u[µM_V]u]
[Page331 t ]u]µÀX}v}u]^v]}v_t Production and utility functions]
BREACH OF DUTY:
- sometimes harm and proximate cause enough = STRICT LIABILITY
- ^vPo]Pvµo_t rule of liability requiring plaintiff to prove harm, causation, and fault
(permits defense that accident occurred despite fact that injurer satisfied all of the applicable
standards of care)
- Fault = binary OR continuous (legal standard of care/precaution applies to a CONTINUOUS
variable)
o X=legal standard of precaution
x<X @ fault
x>X not @ fault
- Determination of fault: government regulations (e.g. reckless driving), duty of REASONABLE
CARE (too little guidance to people, too much discretion to judges)
o ^µ}(]PZ_
o Paterfamilias t person is obligated to treat some other people like a father treats his
family
o ^]}vo]Ç_t choosing effective means to legal ends
Minimizing Costs/PRECAUTION: (GRAPH t Figure 8.3)
- High transact costs Æ private agreement Æ tort liability induces injurers to internalize costs
imposed on other people
- 2 costs of tort law: 1) cost of harm 2) cost of avoiding harm
- Increase precaution = decrease probability of harm
o X t degree of precaution
o w t cost of precaution ($)
o WX t total amt spent on precaution - COST
o P t probability of harm (p=p(x) Æ decreasing function of x)
o A t monetary value of harm
o A*P(x) t expected harm in dollars t COST (also a decreasing function of x)
o X Æ loss of money, time, convenience
[simple model: assumes there are only the 2 costs t no other social costs]
Ö EXPECTED SOCIAL COSTS OF ACCIDENTS THEREFORE = SC = wx + p(x)A (U-Shaped curve)
o Lowest point on the SC curve = x* = socially efficient level of precaution
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