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UW-Madison ECON 522 - Econ 522 Lecture 16 Notes

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Econ 522 Economics of LawLast week…Model of unilateral harmSlide 3Effect of liability rules on precautionRule 1: No LiabilityRule 2: Strict LiabilitySlide 8So for accidents with unilateral precaution…Rule 3: “Simple Negligence”Rule 3: Simple Negligence Injurer precautionRule 3: Simple Negligence Victim precautionSlide 13In fact, there are several ways we could implement a negligence ruleThe cool part…Discrete example of bilateral precautionDifferent negligence rulesNegligence with a Defense of Contributory NegligenceSlide 19Comparative NegligenceSlide 21Strict Liability with a Defense of Contributory NegligenceSo with bilateral precaution…(Aside: with bilateral precaution, things occasionally get more complicated…)So far, our results seem to favor negligence rules…Slide 25Activity levelsActivity levels under a rule of no liabilityAdding activity levels to our results on precaution…Activity levels under a rule of strict liabilitySlide 31What about activity levels under negligence rules?Slide 33Negligence with Defense of Contributory Negligence, and Comparative NegligenceSlide 35Strict Liability with Defense of Contributory NegligenceSlide 37Slide 38Slide 39With each negligence rule…So which rule is best?Friedman: activity is just unobservable precautionSlide 42Steven Shavell, Strict Liability Versus NegligenceSlide 45Slide 46Next case: accidents between “sellers and strangers”Accidents between businesses and strangersSlide 49Final case: accidents between businesses and their own customersAccidents between businesses and their own customers: strict liabilityAccidents between businesses and their own customersAccidents between businesses and their own customers: negligenceSlide 54Accidents between businesses and their own customers: no liabilitySlide 56Next few lectures…Econ 522Economics of LawDan QuintSpring 2011Lecture 162Elements of a tortHarm; causation; breach of duty (negligence)Strict liability rule: no need to prove negligence, just harm and causationNegligence rule: need to prove all three elementsPrecaution: any actions taken to reduce likelihood of an accidentBegan to set up simple model to evaluate liability rulesLast week…3Model of unilateral harmx level of precautionw marginal cost of precautionp(x) probability of an accidentA cost of an accidentPrecaution (x)$p(x) A (Cost of Accidents)wx (Cost of Precaution)wx + p(x) A(Total Social Cost)x* (Efficient Level of Precaution)x < x* x > x*4Effect of Liability Ruleson Precaution5Three rules we’ll consider:No liabilityStrict liabilityNegligenceEffect of liability rules on precaution6Injurer’s private costis just wxMinimized at x = 0Victim’s private costis p(x) A + wxMinimized at efficientprecaution level x = x*So rule of no liability leads to efficient precaution by victims, no precaution by injurersRule 1: No Liabilityx$p(x) Awxwx + p(x) Ax*Private cost to injurerPrivate cost to victim7Perfect compensation(Damages = A)Injurer’s private costis p(x) A + wxMinimized at efficientprecaution level x = x*Victim’s private costis just wxMinimized at x = 0So rule of strict liability leads to efficient precaution by injurers, no precaution by victimsRule 2: Strict Liabilityx$p(x) Awxwx + p(x) Ax*Private cost to injurerPrivate cost to victim8Effect of liability rules on precautionEfficientZeroStrict LiabilityZeroEfficientNo LiabilityInjurerprecautionVictimprecaution9When it’s the injurer who can take precautions, a rule of strict liability is more efficientWhen it’s the victim who can take precautions, a rule of no liability is more efficientEach rule works well for one incentive, poorly for otherSimilar to paradox of compensation we saw in contract lawNegligence rule may allow us to get both incentives rightSo for accidents with unilateral precaution…10Legal standard of care xnInjurer is liable for damages if precaution level was below the legal standard of carex < xn  D = Ax  xn  D = 0So on our graph from before, private cost to injurer is…wx + p(x) A for x < xnwx for x  xnSince we’re shooting for efficiency, we’ll suppose xn = x*Rule 3: “Simple Negligence”11Rule 3: Simple NegligenceInjurer precautionx$p(x) Awxwx + p(x) Axn = x*Private cost is wx + p(x) A if x < xn, only wx otherwiseIf standard of care is set efficiently (xn = x*), injurer minimizes private cost by taking efficient precautionPrivate cost to injurer12Rule 3: Simple NegligenceVictim precaution$p(x) Awxwx + p(x) Ax*What about victim?We just said, injurer will take efficient precautionWhich means injurer will not be liableSo victim bears costs of any accidents(Victim bears residual risk)So victim’s private cost is wx + p(x) AVictim minimizes private cost by taking efficient level of precaution too!Private cost to victim(assuming injurer takes efficient level of precaution and is therefore not liable for damages)13Effect of liability rules on precautionEfficientEfficientSimple Negligence,with xn = x*EfficientZeroStrict LiabilityZeroEfficientNo LiabilityInjurerprecautionVictimprecaution14Rule we just saw: injurer is liable if he was negligent, not liable if he wasn’t“Simple Negligence”Doesn’t consider whether victim was negligent, only injurerBut we can consider both whether injurer was negligent, and whether victim was negligent, in determining liability“Negligence with a defense of contributory negligence” – injurer owes nothing if victim was also negligent“Comparative negligence” – if both were negligent, share cost“Strict liability with defense of contributory negligence” – injurer is liable unless victim was negligentIn fact, there are several ways we could implement a negligence rule15When standards of care for both injurer and victim are set to the efficient level……any of these negligence rules leads to efficient level of precaution by both partiesAlready saw this works for simple negligenceCould show the others the same wayInstead, we’ll do a discrete exampleThe cool part…16No “levels” of precaution – each party can either take precaution or notEach accident causes $1,000 of harmPrecaution costs $20 for each partyChance of an accident is10% if nobody takes precaution6% if one party takes precaution2% if both parties take precautionNote that


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UW-Madison ECON 522 - Econ 522 Lecture 16 Notes

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