ECO320H1 Chapter Notes - Chapter 6: Strict Liability, Marginal Cost, In Private

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23 Nov 2014
ECO 320
Textbook Notes
Chapter 6: An Economic Theory of Tort Law
Tort law was created to deal with compensable wrongs that do not arise from
breach of contract (contract law) and cannot be remedied by an injunction against
future interference (property law).
Tort is derived from the Latin word tortus (twisted).
Types of torts:
Most intentional torts are crimes including:
oFalse imprisonment
oIntentional affliction of emotional duress
A person who commits one of these may be sued for
damages under tort law by the victim and also prosecuted
under criminal law by the state.
These are inadvertent accidents.
Tort law concerns relationships among people for whom TC of private agreements
are relatively high.
oThey may be high for a variety of reasons:
you may have been mad and so you punched
Private information
manufacturer knew the product could
injure someone but did nothing about it
The economic purpose of tort liability is to induce injurers and victims to
internalize the costs of harm that can occur from failing to take care
(accomplished by making the injurer compensate the victim).
oThe economic essence of tort law is its use of liability to internalize
externalities created by high TC.
By internalizing the cost of their wrongdoing, the injurer has an
incentive to invest in safety at the efficient level.
Three elements that must be present for recovery by the plaintiff under the
traditional theory of torts:
oThe plaintiff must have suffered harm
oThe defendant’s act/failure to act must have caused the harm
oThe defendant’s act/failure to act must constitute the breach of a duty
owed to the plaintiff by the defendant
Harm can be defined simply as a downward shift in the victims utility or profit
oCompensation can be for both tangible and intangible forms of harm:
Tangible can include:
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Medical costs
Lost wages
Costs of replacing damaged property
Intangible can include:
Emotional harm
Loss of companionship
Pain and suffering
Perfect compensation: a sum of money is awarded that is sufficient to make the
victim of an injury equally well off with the money and injury as they would have
been without the money or the injury.
oPut the person back at their original level of utility.
Including compensation for intangible harm as an advantage/disadvantage:
oAdvantage: real harms suffered would otherwise have gone unredressed.
oDisadvantage: hard to quantify the harm suffered because the court cannot
observe and measure the plaintiff’s subjective valuation of the harm.
Perfect compensation would be hard to achieve with intangibles.
The difficulty in quantifying harm leads to liability disparity.
Liability disparity: when the same court awards different
amounts of compensation to victims who suffered the
identical injury (can also vary between countries).
Two types of causes:
The “but-for test” is used to determine if something was cause-in-
I.e. determine if action A was the CIF of event B; but-for A,
would B have occurred?
it is the CIF; Yes
it is not the CIF
It is hard to apply when there are multiple causes that could have
led to the injury.
I.e. you smoke, work in a carcinogenic facility and live in
an asbestos filled home
which gave you lung cancer?
The cause-in-fact must be the proximate cause of the plaintiffs
harm for liability to be established.
I.e. punching someone; but-for the person being born, they
wouldn’t have been punched
not the proximate
The functional representation of cause in tort law is a variable controlled by one
person that appears in the utility/production function of someone else.
oWhen the first person changes their consumption of the variable, the
utility/production of the other person changes.
The utility/production functions are interdependent.
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Thus the “cause” creates an externality since the two
parties cannot bargain (high TC).
a, x1
b, x1
a, x2
b, x2
was smoking, as person 1 smokes more, person 2’s utility falls.
Strict liability: a rule of liability solely based upon harm and causation.
oGenerally applies to abnormally dangerous activities.
oManufacturers are strictly liable in America for the harm that their
products cause.
A plaintiff will normally need to demonstrate that the defendant breached a duty
that they owed to the plaintiff, and that the breach caused the harm.
Negligence: a rule of liability where the plaintiff must prove harm, causation, and
oThe defendant can escape liability if they satisfied the applicable standard
of care to avoid the harm that they caused.
A standard of care prescribes the minimum acceptable level
of precaution.
Using the continuous variable
to denote the level of
precaution taken by a defendant in avoiding causing
harm and
to denote the standard level of care required
by law:
Fault can be
determined by consulting safety regulations,
social norms and conventions, etc.
Duty of reasonable care: compares the defendants actual care and the care
that a reasonable person would have taken under the circumstances
oThe standard that exists in common law countries.
Standards used in civil law countries:
oAbuse of right
exercising your right in a way that hurts others.
a person obligated to treat others as a father treats his
choosing effective means to legal ends.
Not Liable
Liable → Negligent
probability of an accident
(decreases as more precaution is taken).
A →
expected monetary value of the harm.
A →
expected value of the harm.
w →
precaution costs per unit
wx →
total amount spent on precaution.
the expected social cost at a
given level of precaution (summation of costs
0 x
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