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
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
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
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,
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
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
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:
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.
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: