Chapter 8: An economic theory of tort law
What is tort law? Tort law occurs when there is a breach of a duty owed to society. It occurs
when the victim cannot sue under property law because it does not involve property, nor contract
law, because the parties did not enter into any contract. The most common examples of tort law
cases involve auto accidents, slander/libel, product liability, environmental pollution, etc.
Tort law is usually unintentional harm; intentional torts are usually crimes.
Tort law exists because the costs of bargaining for some kinds of harm are so high that parties
cannot cooperate together. Example: every drive cannot negotiate with every other driver to
allocate the costs of future accidents. Nor can every driver enter into a contract with every other
person that might be injured. Another reason is when absolute costs are low, but relative costs are
high. Example: Three hunters go hunting. Before hunting, they could negotiate an agreement to
allocate cost of an accident; however the probability of an accident is low, so cost of negotiating
Economic purpose of tort liability is to induce injurers and victims to internalize the costs of
harm that can occur. The economic essence of tort law is its use of liability to internalize
externalities created by high transaction costs.
Traditional theory of torts:
Three elements must be present for plaintiff’s recovery:
1. The plaintiff must have suffered harm. For example, the owner of a car with a
conventional carburetor cannot be compensated if the manufacturer sells carburetors, but
only the turbocharged ones are defective. Courts trying to internalize costs often use
perfect compensation, but it is hard to implement because the value of intangible harm
(such as death) is hard to estimate.
2. The defendant must have caused the harm. For example, if the two hunters both shoot the
third hunter accidentally, only the one who actually did damage is liable. The ‘but-for’
rule decides whether event A caused event B: But for A, would B have occurred? In a
series of multiple events, the approximate cause is the most proximate event (the event
that is closest to the one causing the harm).
3. The defendant must have breached his duty. In short, the defendant must have been at
fault, or ‘negligent’. Some fault is binary (yes or no), but some is continuous (a car can
change speed continuously). The legal standard of care is the minimum acceptable
standard of precaution. This is the standard of precaution a ‘reasonable’ person would
take (ie. Driving at or less than the speed limit).