ECO320 Tort law Review Chapters 6 and 7

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University of Toronto St. George
Donald Dewees

Eco320 Review: Tort law goal: Minimize the cost of accidents, cost of precaution and cost of administration  Three Characteristics of Tort: o Harm, Causation, Breach of Duty.  To reason out Efficient rule: o How parties respond? o Incentive effects-Costs future parties would have to undertake as a result of this rule to avoid accident and its subsequent benefits? o Least-cost avoider=> Person who bears the least cost is usually held liable(most efficient)  Different rulings: o Negligence – Needs proof of negligence o Strict Liability – Needs proof of causation  Rship between social costs of accidents and amount of precaution. o p => probability of an accident (decreases with increase in precaution) and therefore p(x) is a decreasing function of x o A is monetary value of harm caused and therefore expected value of harm is p(x)A o $w/unit is precaution cost. Assume w is constant and wx is total spent on precaution o SC is social costs which is a sum of expected value of harm + precaution costs. o Efficiency is at lowest point of SC – x* o By taking derivative of SC and equating to zero=> w=-p’(x*)A [marginal cost=marginal benefit] o If x>x*, w> -p’(x*)A  US Tort Liability Rules: o No Liability Victim bears the loss, all xi,xv o 2)Strict Liability Injurer bears the loss, all xi,xv o 3)Negligence Injurer bears loss for xi < xi*, victim bears the loss for xi ≥ xi*  The reason Injurer activity levels are high are because how much ever his activity is increased, as long as he maintains efficient standard of care, he remains free from any loss. o 4)Strict Liability with defence of contributory negligence Injurer bears loss except if xv < xv*  Focus on victims levels of precaution  Similar to Negligence rule, as long as victim maintains an efficient standard of care, they can increase their activity level to how much ever they want to. o 5)Negligence with defence of contributory negligence (US) Injurer bears loss if xi< xi* and xv ≥ xv* else victim bears loss.  Focus on injurers level of precaution  Activity level will be high for the injurer since only if both conditions are met – negligent on his part AND lack of efficient care by victim, will he be liable to pay, otherwise not. o 6)Comparative Negligence(Canada) Injurer bears A*(xi*-xi)/((xi*-xi)+(xv*-xv)), victim bears the rest. o Goal: MIN C (x, x ) = WX + W X + A*P (x, x ) s i v i i v v i v o xi = injurer’s care cost. xv = victim’s care cost. W = MC of x i, v A = cost of an accident ; P = probability of an accident  Learned Hand Negligence: o If wi< -p’A then injurer is negligent and must undertake cost-justifying measure until w=i’A o Sometimes efficient cost-justifying precautions are drafted into law. Eg: Speed limits=>value of time of commuters and and reduction in accidents in driving more slowly. o MB must include decrease in risk to others AND risk to self. o D is NEGL if Xi own insurer provides benefits according to fault  Extending the economic model for Torts: o Rationality:  Undersestimating probability of the accident to zero or overestimating the probablilities of huge catastrophies. Leads to inefficiency since almost no precaution is taken or too much is. o Regulation:  Regulation can work hand in hand with Liability. Regulation – ex-ante and by administrators. Liability- ex-post enforcement by courts  Regulation – by specialized administrators however there can be political motivations, or set too high so that it would be cheaper to bribe. Liability- if too high,undercapitalized firms will take risk and trade with highly-capitalized will stay away from them. Regulations -> fines and prevents such from happening. o Insurance:  Reallocates costs of accidents to according to contracts between insurer and insured and hence people are more worried about insurance rates and coverage than with underlying laws.  Causes moral hazard(less care taken). Combatted by:
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