Economics of Tort Law

CBO Study. The Economics of U.S. Tort Liability: A Primer, October 2003

U.S. Department of Justice, Civil Justice Survey of State Courts,

2001

Tort Law
Tort injury to person or
property
We are interested in
unintentional torts,
inadvertent accidents.
Injuries sustained by
breach of contract are
covered under contract
law

Tort liability
A court imposed obligation
on the tortfeasor to pay
for a victims losses.

An efficient system would

minimize these elements of cost

Cost of injuries
Cost of precaution
Cost of administration
Indirect costs to
economy

An efficient system would

internalize externalities

Traditional tort liability requires

three elements
1. Breach of Duty - The
defendants act or failure
to act must constitute
the breach of a duty
owed to the plaintiff by
the defendant
2. Harm - The plaintiff must
have suffered a harm
3. Cause - The defendants
act or failure to act must
cause the harm

Breach of duty
Strict liability rule - only
harm and cause are
required for a tort
any harm is a breach of due
care

Negligence rules require a

minimum duty of care

Duty of care
A legal standard
prescribing the minimum
acceptable level of
precaution
Violation of the due care
standard represents
negligence
Due care standard is based
upon a reasonable person

Harm
There typically must be an
actual harm.
Liability law does not
compensate for exposure to risk

Perfect compensation would

compensate for both property
losses and intangible harm.
Should reimbursement occur for
intangible harms?
How do we determine the value
of intangible harms? (The death
of a child.)

Cause
But for test (cause in fact)
Problem when there are multiple
causes (ambiguous causation)
Ex., Medical malpractice cases

Proximity in the law is

imprecise
But for test does not distinguish
between proximate causes and
remote causes
Proximate cause satisfies the but
for test and is sufficiently direct
to be the determined the legal
cause of the injury

The economic purpose of tort law

is to minimize the social cost of
accidents.
We will assume only cost of injury
and cost of precaution
x = precaution
w = cost of a unit of precaution
A = monetary value of the harm
p(x) = probability of harm

Minimize social cost

Precaution
Unilateral precaution
Only the injurer or only the
victim can influence the
probability or severity of
injury

Bilateral precaution
Both the injurer and the
victim can influence the
probability or severity of
injury

Tort law incentives

Strict liability with
perfect compensatory
damages gives the victim
no incentive to take
precaution
No liability gives the
injurer no incentive to
take precaution

Strict liability
Appropriate when only
unilateral precaution by
the injurer is possible
Injurer has incentive to
minimize total social cost
Assumes costs can be
accurately measured and
injurer will be found liable
for all harms he caused

Bilateral precaution
When bilateral precaution is
possible neither rule
causes both to take the
optimal level of
precaution

Negligence standard
Negligence rule with
perfect compensation and
the legal standard set to
the efficient level of care
gives the injurer incentives
for efficient precaution.
Victim responds as if there
is no liability, therefore
victim has efficient
incentive for precaution

 Negligence rules give the

victim and the injurer
efficient incentives for
precaution
Negligence rule is
preferred when there is
bilateral precaution

Negligence rules
Simple negligence
Negligence with defense
of contributory negligence
Comparative negligence
Strict liability with
defense of contributory
negligence

 Simple negligence
Injurer at fault => injurer
liable
Injurer faultless => injurer
not liable

Negligence with
defense of contributory
negligence
Injurer at fault and victim
faultless => injurer liable
Injurer faultless or victim at
fault => injurer not liable

 Comparative negligence
Injurer at fault and victim
faultless => injurer bears 100%
Injurer faultless and victim at
fault => victim bears 100%
Injurer at fault and victim at
fault => bear cost in proportion
to negligence

Strict liability with

defense of contributory
negligence
Victim at fault => injurer not
liable
Victim faultless => Injurer
liable

Activity vs. Precaution

With simple negligence the
carnival operator is relieved of
all liability as long as he
adheres to the due standard.
However, even with
inspections, mishaps can
occur, passengers can be
injured.
There is no incentive to limit
the passengers on the ride or
the number of carnivals.

Activity vs. Precaution

Passengers, however, may
take this into consideration.
This may limit the number of
passengers (the activity level.)
When they do get on the ride
they might also take some
precaution. They will make
sure restraints are functioning
and will keep their hands and
feet in.

Activity levels
Under a negligence rule the marginal
risk of harm to others by engaging in
the activity is externalized. Under
strict liability, the social cost of
accidents is internalized. Induces
efficient precaution and efficient
activity by injurers.
The party who escapes bearing the
cost has an incentive for an
inefficient activity level.
Efficiency requires choosing a liability
rule so that the party whose activity
level most affects accidents bears
the residual cost of accidental harm.
Liability rules cannot provide an
efficient incentive for bilateral
activity levels

No single rule can create efficient

incentives for both bilateral
precaution and bilateral activity
levels.

The Hand Rule for identifying

efficient precaution
United States v. Carroll
Towing Co., (2d Cir. 1947)
Defendant hired to move
barge
The mooring lines were not
correctly adjusted
A barge broke loose and
sank
The tug owner argued that
barge owner was also
negligent because there
was no bargee

The Hand Rule for identifying

efficient precaution

Since there are occasions when every

vessel will break from her moorings, and
since, if she does, she becomes a menace
to those about her; the owner's duty, as in
other similar situations, to provide against
resulting injuries is a function of three
variables: (1) The probability that shewill
break away; (2) the gravity of the resulting
injury, if she does; (3) the burden of
adequate precautions.
it in algebraic terms: if the probability
be called P; the injury, L; and the burden,
B; liability depends upon whether B is less
than L multiplied by P: i.e., whether B less
than PL.

The Hand Rule for identifying

efficient precaution
Optimal precaution

w p( x ) A
If the marginal cost of precaution is less
than the marginal benefit from
precaution, the party is negligent.

w p( x ) A
When B < PL, the party is negligent

Potential errors
Errors in setting due care
standard
Errors in damage award

Errors Strict Liability

Errors in setting damages
under a rule of strict
liability cause the injurers
precaution to respond in
the same direction as the
error
Errors in failing to hold
injurers liable under a rule
of strict liability causes
them to take less
precaution

Errors - Negligence
Injurers negligence does
not respond to modest
errors in setting damages
under the negligence rule
Injurers precaution
responds exactly to court
errors in setting the legal
standard under a
negligence rule

Exceptions in tort liability

Firefighter rule
Good Samaritan
protection
Public policy rule

Firefighter rule
Precludes a firefighter from
recovering from one whose
negligence causes or
contributes to a fire that in
turn causes injury or death
to the firefighter
There is an assumption of
risk
May be limited to premises
liability and ordinary
negligence

Good Samaritan protection

Provides protection from
ordinary negligence when
providing emergency
assistance
There may be no general
duty to render assistance

Public policy rule

Damages would run
counter to public policy
goals
A victim should not benefit
from their own criminal
behavior
A bomb maker sued those
who sold him the gunpowder
A suit by a burglar against
the homeowner for faulty
stairs

Alcohol related liabilities

An injured person can sue
those who contributed to
the injurers intoxication
Dram shop laws
Social host laws

There was a special duty

of care because the
injurer was invited to
drink

Youll shoot your eye out

Swix v Daisy Manufacturing,
US District Court 2004
373 F.3d 678

Swix v Daisy Manufacturing

After losing the use of his eye, Aaron,
a minor, and his parents brought a
product liability action against the
manufacturer of the air rifle that his
11-year-old friend used to shoot him.
The case claimed that the air rifle
was defectively designed.
The lower court dismissed the claim
a gun is a simple tool under
Michigan law and the dangers of
pointing it at another person are
open and obvious.

There is no need to warn of a danger

where the danger is obvious
The product itself telegraphs the
precise warnings the plaintiffs claim is
lacking

Swix v Daisy Manufacturing

The appeals court found that gun
was a simple tool. However, the
lower court failed to apply the
reasonable child standard.
A manufacturer who bypasses
adults, upon whom the law ordinarily
places responsibility, and markets a
simple, but dangerous, tool directly
to children may not avoid liability on
the ground that the child should
have known better
The fact that Daisy intended that its
air rifle be used under the direct
supervision of an adult and that
Swixs grandfather had the same
rule does not alter the reasonable
child standard