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 162HW2 due nowMidterm ThursdayLogistics3Tort lawHarm, causation, breach of dutyStrict liability ruleNo need to prove negligence (breach of duty), just harm and causationVersus negligence ruleNeed to prove all three elementsToday: economic model of tortsLast Thursday…4Precaution5The more carefully I drive, the less likely I am to hit youDuhBut, driving more carefully is also more costly to meMust be some efficient level of carePrecaution6The more carefully I drive, the less likely I am to hit youDuhBut, driving more carefully is also more costly to meMust be some efficient level of careWhat determines how carefully I drive is what I think will happen if I hit youTort law creates incentivesThe essence of tort law is to use liability to get injurers to internalize the externalities their actions causePrecaution7Unilateral harm – only one victimPrecaution – costly actions that make accident less likelyCould be taken by either victim or injurerWe’ll focus on one at a timeNotationx – the level of precaution that is takenw – the cost of each “unit” of precautionso total cost of precaution is wxp(x) – probability of an accident, given precaution xp is decreasing in xA – 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)$p(x) A (Cost of Accidents)wx (Cost of Precaution)wx + p(x) A(Total Social Cost)x* (Efficient Level of Precaution)9efficient precaution: minx { wx + p(x) A }w + p’(x) A = 0w = – p’(x) AUnder reasonable assumptions (p(x) convex)…x < x* w < – p’(x) A MSB of precaution greater than MSC more precaution efficientx > x* w > – p’(x) A MSC of precaution greater than MSB less precaution efficientx = x* MSB = MSCModel of unilateral harmx level of precautionw marginal cost of precautionp(x) probability of an accidentA cost of an accidentmarginal social cost of precautionmarginal social benefit of precaution10Model of unilateral harmx level of precautionw marginal cost of precautionp(x) probability of an accidentA cost of an accidentx$p(x) Awxwx + p(x) Ax*x < x* x > x*11We haven’t yet said who is taking precautionSome cases, only injurer can reduce accidentsSome cases, victim can tooModel 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 harm12No liabilityStrict liabilityNegligenceEffect of liability rules on precaution13Victim precautionPrivate cost to victim: wx + p(x) AVictim sets w = – p’(x) ARule of no liability leads to efficient level of victim precautionInjurer precautionPrivate cost to injurer: wxInjurer sets x = 0Rule of no liability leads to inefficiently low level of injurer precautionRule 1: No Liability14Effect of liability rules on precautionZeroEfficientNo LiabilityInjurerprecautionVictimprecaution15Perfect compensation: damages D = AVictim precautionPrivate cost to victim: wx + p(x) (A – D) = wxVictim sets x = 0Social cost is wx + p(x) A, efficient level satisfies w = – p’(x) AStrict liability leads to inefficiently low level of victim precautionInjurer precautionPrivate cost to injurer: wx + p(x) D = wx + p(x) AInjurer sets x efficientlyStrict liability leads to efficient level of injurer precautionRule 2: Strict Liability16Effect of liability rules on precautionEfficientZeroStrict LiabilityZeroEfficientNo LiabilityInjurerprecautionVictimprecaution17When it is the injurer who can take precautions, a rule of strict liability is more efficientWhen it is the victim who can take precautions, a rule of no liability is more efficientEach rule works well for one incentive, poorly for otherSimilar to paradox of compensation we already sawWhat about bilateral precaution?Negligence rule may allow us to get both incentives rightSo for accidents with unilateral precaution…18Legal standard of care xnInjurer is liable for damages if precaution level was below the legal standard of carex < xn D = Ax xn D = 0So on our graph from before, private cost to injurer is…wx + p(x) A for x < xnwx 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 LiabilityInjurerprecautionVictimprecaution21Rule we just saw: injurer is liable if he was negligent, not liable if he was notBut 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
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