DOC PREVIEW
UW-Madison ECON 522 - Lecture 16

This preview shows page 1-2-3-26-27-28 out of 28 pages.

Save
View full document
View full document
Premium Document
Do you want full access? Go Premium and unlock all 28 pages.
Access to all documents
Download any document
Ad free experience
View full document
Premium Document
Do you want full access? Go Premium and unlock all 28 pages.
Access to all documents
Download any document
Ad free experience
View full document
Premium Document
Do you want full access? Go Premium and unlock all 28 pages.
Access to all documents
Download any document
Ad free experience
View full document
Premium Document
Do you want full access? Go Premium and unlock all 28 pages.
Access to all documents
Download any document
Ad free experience
View full document
Premium Document
Do you want full access? Go Premium and unlock all 28 pages.
Access to all documents
Download any document
Ad free experience
View full document
Premium Document
Do you want full access? Go Premium and unlock all 28 pages.
Access to all documents
Download any document
Ad free experience
Premium Document
Do you want full access? Go Premium and unlock all 28 pages.
Access to all documents
Download any document
Ad free experience

Unformatted text preview:

Econ 522 Economics of LawLogisticsLast Thursday…Slide 3PrecautionSlide 6Model of unilateral harmSlide 8Slide 9Slide 10Slide 11Effect of liability rules on precautionRule 1: No LiabilitySlide 14Rule 2: Strict LiabilitySlide 16So for accidents with unilateral precaution…Rule 3: NegligenceInjurer precaution under a negligence ruleSlide 20For bilateral precaution, different ways to implement a negligence ruleSlide 22Slide 23Here’s the cool part…Even in a setting with bilateral precaution…(I mentioned, with bilateral precaution, things occasionally get more complicated…)So far, our results seem to favor negligence rules… but…Slide 27Econ 522Economics of LawDan QuintFall 2009Lecture 162HW2 due nowMidterm ThursdayLogistics3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 tortsLast Thursday…4Precaution5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 carePrecaution6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 causePrecaution7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) AModel of unilateral harmx level of precautionw marginal cost of precautionp(x) probability of an accidentA cost of an accident8Model of unilateral harmx level of precautionw marginal cost of precautionp(x) probability of an accidentA cost of an accidentPrecaution (x)$p(x) A (Cost of Accidents)wx (Cost of Precaution)wx + p(x) A(Total Social Cost)x* (Efficient Level of Precaution)9efficient precaution: minx { wx + p(x) A }w + p’(x) A = 0w = – p’(x) AUnder reasonable assumptions (p(x) convex)…x < x*  w < – p’(x) A MSB of precaution greater than MSC  more precaution efficientx > x*  w > – p’(x) A MSC of precaution greater than MSB  less precaution efficientx = x*  MSB = MSCModel of unilateral harmx level of precautionw marginal cost of precautionp(x) probability of an accidentA cost of an accidentmarginal social cost of precautionmarginal social benefit of precaution10Model of unilateral harmx level of precautionw marginal cost of precautionp(x) probability of an accidentA cost of an accidentx$p(x) Awxwx + p(x) Ax*x < x* x > x*11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 precautionModel of unilateral harm12No liabilityStrict liabilityNegligenceEffect of liability rules on precaution13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 precautionRule 1: No Liability14Effect of liability rules on precautionZeroEfficientNo LiabilityInjurerprecautionVictimprecaution15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 precautionRule 2: Strict Liability16Effect of liability rules on precautionEfficientZeroStrict LiabilityZeroEfficientNo LiabilityInjurerprecautionVictimprecaution17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 rightSo for accidents with unilateral precaution…18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  xnRule 3: Negligence19Injurer precaution under anegligence rulex level of precautionw marginal cost of precautionp(x) probability of an accidentA cost of an accidentx$p(x) Awxwx + p(x) Axn = x*If legal standard of care is set to efficient level (xn = x*), negligence rule leads to efficient injurer precautionPrivate cost to injurer20Effect of liability rules on precautionEfficientEfficientNegligence,with xn = x*EfficientZeroStrict LiabilityZeroEfficientNo LiabilityInjurerprecautionVictimprecaution21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 rule22For bilateral precaution, different ways to implement a negligence ruleNoYesNoNoNegligence with Defense of Contributory NegligenceYesYesNoNoSimple NegligenceBoth


View Full Document

UW-Madison ECON 522 - Lecture 16

Documents in this Course
Lecture 4

Lecture 4

46 pages

Lecture 5

Lecture 5

31 pages

Lecture 7

Lecture 7

39 pages

Lecture 9

Lecture 9

24 pages

Lecture 7

Lecture 7

13 pages

Lecture 6

Lecture 6

14 pages

Logistics

Logistics

35 pages

Logistics

Logistics

41 pages

Logistics

Logistics

36 pages

Lecture 8

Lecture 8

21 pages

Lecture 8

Lecture 8

47 pages

Lecture 9

Lecture 9

49 pages

Lecture 6

Lecture 6

46 pages

Logistics

Logistics

49 pages

Load more
Download Lecture 16
Our administrator received your request to download this document. We will send you the file to your email shortly.
Loading Unlocking...
Login

Join to view Lecture 16 and access 3M+ class-specific study document.

or
We will never post anything without your permission.
Don't have an account?
Sign Up

Join to view Lecture 16 2 2 and access 3M+ class-specific study document.

or

By creating an account you agree to our Privacy Policy and Terms Of Use

Already a member?