Part D-II The Economics of Tort Law

1. Part D-II The Economics of Tort Law Tort_F1

2. Objectives • Setting legal standards • Errors Tort_F1

3. Setting legal standards Recall that all of the tort rule ‘efficiency’ results rely on the courts being able to set the legal standard of care (x’) at the efficient level of precaution (x*). But how do courts actually determine the legal standard of car (x’) and does it approximate the efficient level of precaution (x*) in a given case? The range of accidents considered by courts is vast. Tort_F1

4. Setting legal standards A. Reasonable care, reasonable person, unwritten social norms, community standards B. Professional standards, codes of ethics, standards of practice C. Laws and regulations (speed limits, fire regulations, health and safety regulations) D. The Hand rule Tort_F1

5. Setting legal standards – the Hand rule The Hand Rule (Unites States v. Carroll Towing Co 1947): The injurer is negligent if the costs of the precaution that could have been ‘purchased’ is less than the resulting benefit (the reduction in the cost of harm that it yields). The model: let p = probability of a fatal accident (our p(xv,xi)) L = the monetary value of the loss if an accident occurs (our A) B = cost (burden) of the additional precaution (our w or wx?) If B <= pL then the injurer should have made the effort and if the injurer did not ‘buy’ B, then he/she is liable. Tort_F1

6. Example: A farmer’s cattle sometime wander unto a local road. If a car hits a cow, the average cost of an accident is $75,000. The probability of an accident over the next ten years is 0.05. The cost of building and maintaining a fence over the next ten years is $2,500 Then, B = $2,500 and pL = (0.05*$75,000) = $3,750 so that B < pl If the farmer does not build the fence and an accident happens, then under Hand’s rule he will be found to have been negligent and will be liable. Tort_F1

7. American courts regularly apply the Hand rule. If we think in marginal terms, then p = -Δp/Δxi L = A B = wi and the Hand rule becomes: if wi <= -Δp/Δxi A, then the injurer should have made the ‘expenditure’ or she will be liable were an accident to occur. This is our efficiency rule. Tort_F1

8. Errors Not surprisingly, if courts make errors in finding liability or assessing damages, then this might affect behaviour This notion of ‘errors’ implies that they are systematic, in one direction and not likely to be corrected. If they are truly random ‘errors’ the analysis is different (i.e. expected values would be the same). Tort_F1

9. Errors Under Strict Liability Systematic court errors in assessing damages cause the potential injurer’s optimal precaution to respond in the same direction. Systematic court errors in failing to hold an injurer liable will cause the potential injurer to take less precaution. Tort_F1

10. Errors Under Strict Liability If court awards excess damages potential injurers will take excessive precaution Where Aerr > A $ wi xi + p(x’v, xi)Aerr wi xi + p(x’v, xi)A wi xi p(x’v, xi)Aerr p(x’v, xi)A xi 0 x*i xerr Precaution Tort_F1

11. Errors Under a Negligence Rule Since there is a discontinuity at the optimal level of precaution, a potential injurer’s behaviour is not affected by modest systematic court errors in assessing damages. BUT A a potential injurer’s level of precaution will respond directly to systematic court errors in determining the ‘legal standard of care’ Tort_F1

12. Errors Under a Negligence Rule If court awards insufficient or excess damages potential injurer’s behaviour will not be affected - discontinuity Forbidden zone xi < x’i Permitted zone xi > x’i $ wi xi + p(x’v, xi)A wi xi + p(x’v, xi)0.7A wi xi Gap xi 0 x’i Precaution Tort_F1

13. Errors in Setting ‘Standard of Care’ The potential injurer (or victim under other than a simple negligence rule) will set their maximizing level of precaution equal to the standard of care, whether it is correct or not. As long as they meet the standard of care they are not liable and that is their objective E.g. professional colleges with lax standards Tort_F1

14. Errors in Setting ‘Standard of Care’ Potential injurer will choose xi = x’err negligent xi < x’i non-negligent xi > x’i $ wi xi + p(x’v, xi)A wi xi wi x’i wi xerr xi 0 x’err x’i Precaution Tort_F1

15. Errors in Setting ‘Standard of Care’ Potential injurer will choose xi = x’err negligent xi < x’i non-negligent xi > x’i $ wi xi + p(x’v, xi)A wi xi wi xerr wi x’i xi 0 x’i x’err Precaution Tort_F1