econ 522 economics of law dan quint fall 2009 lecture 16
TRANSCRIPT
Econ 522Economics of Law
Dan Quint
Fall 2009
Lecture 16
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HW2 due now
Midterm Thursday
Logistics
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Tort law Harm, causation, breach of duty
Strict liability rule No need to prove negligence (breach of duty), just harm and
causation
Versus negligence rule Need to prove all three elements
Today: economic model of torts
Last Thursday…
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Precaution
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The more carefully I drive, the less likely I am to hit you Duh But, driving more carefully is also more costly to me Must be some efficient level of care
Precaution
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The more carefully I drive, the less likely I am to hit you Duh But, driving more carefully is also more costly to me Must be some efficient level of care
What determines how carefully I drive is what I think will happen if I hit you Tort law creates incentives The essence of tort law is to use liability to get injurers to
internalize the externalities their actions cause
Precaution
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Unilateral harm – only one victim
Precaution – costly actions that make accident less likely Could be taken by either victim or injurer We’ll focus on one at a time
Notation x – the level of precaution that is taken w – the cost of each “unit” of precaution
so total cost of precaution is wx p(x) – probability of an accident, given precaution x
p is decreasing in x A – cost of accident (to victim)
so expected cost of accidents is p(x) A
Model of unilateral harmx level of precautionw marginal cost of precautionp(x) probability of an accidentA cost of an accident
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Model of unilateral harmx level of precautionw marginal cost of precautionp(x) probability of an accidentA cost of an accident
Precaution (x)
$
p(x) A (Cost of Accidents)
wx (Cost of Precaution)
wx + p(x) A(Total Social Cost)
x* (Efficient Level of Precaution)
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efficient precaution: minx { wx + p(x) A }
w + p’(x) A = 0
w = – p’(x) A
Under reasonable assumptions (p(x) convex)… x < x* w < – p’(x) A
MSB of precaution greater than MSC more precaution efficient x > x* w > – p’(x) A
MSC of precaution greater than MSB less precaution efficient x = x* MSB = MSC
Model of unilateral harmx level of precautionw marginal cost of precautionp(x) probability of an accidentA cost of an accident
marginal social cost of precaution
marginal social benefit of precaution
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Model of unilateral harmx level of precautionw marginal cost of precautionp(x) probability of an accidentA cost of an accident
x
$
p(x) A
wx
wx + p(x) A
x*x < x* x > x*
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We haven’t yet said who is taking precaution
Some cases, only injurer can reduce accidents
Some cases, victim can too
Model works fine for either one (unilateral precaution)
Under most conditions, works fine when both parties take precaution (bilateral precaution)
Next: consider effect of different liability rules on precaution
Model of unilateral harm
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No liability
Strict liability
Negligence
Effect of liability rules on precaution
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Victim precaution Private cost to victim: wx + p(x) A Victim sets w = – p’(x) A Rule of no liability leads to efficient level of victim precaution
Injurer precaution Private cost to injurer: wx Injurer sets x = 0 Rule of no liability leads to inefficiently low level of injurer
precaution
Rule 1: No Liability
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Effect of liability rules on precaution
ZeroEfficientNo Liability
Injurerprecaution
Victimprecaution
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Perfect compensation: damages D = A
Victim precaution Private cost to victim: wx + p(x) (A – D) = wx Victim sets x = 0 Social cost is wx + p(x) A, efficient level satisfies w = – p’(x) A Strict liability leads to inefficiently low level of victim precaution
Injurer precaution Private cost to injurer: wx + p(x) D = wx + p(x) A Injurer sets x efficiently Strict liability leads to efficient level of injurer precaution
Rule 2: Strict Liability
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Effect of liability rules on precaution
EfficientZeroStrict Liability
ZeroEfficientNo Liability
Injurerprecaution
Victimprecaution
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When it is the injurer who can take precautions, a rule of strict liability is more efficient
When it is the victim who can take precautions, a rule of no liability is more efficient
Each rule works well for one incentive, poorly for other Similar to paradox of compensation we already saw What about bilateral precaution?
Negligence rule may allow us to get both incentives right
So for accidents with unilateral precaution…
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Legal standard of care xn
Injurer is liable for damages if precaution level was below the legal standard of care x < xn D = A x xn D = 0
So on our graph from before, private cost to injurer is… wx + p(x) A for x < xn
wx for x xn
Rule 3: Negligence
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Injurer precaution under anegligence rule
x level of precautionw marginal cost of precautionp(x) probability of an accidentA cost of an accident
x
$
p(x) A
wx
wx + p(x) A
xn = x*
If legal standard of care is set to efficient level (xn = x*), negligence rule leads to efficient injurer precaution
Private cost to injurer
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Effect of liability rules on precaution
EfficientEfficientNegligence,with xn = x*
EfficientZeroStrict Liability
ZeroEfficientNo Liability
Injurerprecaution
Victimprecaution
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Rule we just saw: injurer is liable if he was negligent, not liable if he was not
But we can consider both whether injurer was negligent…
…and whether victim was negligent…
…when determining whether injurer owes damages(and how much)
For bilateral precaution, different ways to implement a negligence rule
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For bilateral precaution, different ways to implement a negligence rule
NoYesNoNoNegligence with Defense of Contributory Negligence
YesYesNoNoSimple Negligence
Both parties negligent?
Only injurer negligent?
Only victim negligent?
Neither party negligent?
Does injurer owe victim damages when…
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For bilateral precaution, different ways to implement a negligence rule
NoYesNoYesStrict Liability with Defense of Contributory Negligence
PartialYesNoNoComparative Negligence
NoYesNoNoNegligence with Defense of Contributory Negligence
YesYesNoNoSimple Negligence
Both parties negligent?
Only injurer negligent?
Only victim negligent?
Neither party negligent?
Does injurer owe victim damages when…
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When standard of care (for both injurer and victim) is set at the efficient level…
…any of these negligence rules lead to efficient level of precaution by both parties Simple negligence Negligence with a defense of contributory negligence Comparative negligence Strict liability with a defense of contributory negligence
Here’s the cool part…
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Even in a setting with bilateral precaution…
EfficientEfficientAny negligence rule with efficient legal standard of care
EfficientZeroStrict Liability
ZeroEfficientNo Liability
Injurerprecaution
Victimprecaution
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(I mentioned, with bilateral precaution, things occasionally get more complicated…)
Redundant precaution – either party could take precaution, efficiency only requires one of them
If precaution is continuous, any negligence rule still leads to efficient precaution level by both
When precaution is discontinuous, not always Driver can fasten seatbelt, or car company can design seatbelt that buckles
itself (more costly) Simple negligence: car company might be liable if designed manual seatbelt
and driver didn’t use it, so car company might design automatic belt Negligence with defense of contributory negligence: car company escapes
liability, so designs manual belt, rational driver uses it
But as long as precaution is continuous, no problem
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So far, our results seem to favor negligence rules… but…
EfficientEfficientAny negligence rule with efficient legal standard of care
EfficientZeroStrict Liability
ZeroEfficientNo Liability
Injurerprecaution
Victimprecaution
Up next: activity levels Steven Shavell, “Strict Liability Versus Negligence”
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Good luckon Thursday!