Econ 522 – Lecture 15 (Nov 4 2008)Midterm is not yet graded. Hopefully by the end of the week.One point I want to quickly revisit.There are two separate questions we addressed when looking at the question of breach:- when do we expect a promisor to breach?- when would it be efficient for a promisor to breach?These are different questions, and may have different answers.We expect a promisor to breach when it’s cheaper to breach than to perform, that is, whenhis liability for breach (presumably, the damages he’ll owe) is greater than the cost of performance. This has nothing to do with efficiency – it’s just one guy, doing what is best for him, given the options he faces.Now, the question of efficiency involves summing up everyone’s payoffs – in this case, the promisor and the promisee. It’s efficient for the promisor to breach when the total payoffs are higher when he breaches than when he performs. Since it’s usually the promisor who’s incurring costs and the promisee who’s getting benefits, this will typically be when the cost of performing is higher than the benefit of performance.So the challenge, when designing a remedy, is to make the two solutions match – that is, to make the promisor, when he’s just thinking about himself, breach exactly in the times when it’s efficient for him to breach. But it’s important to keep the two concepts distinct – the promisor will do what is in his best interest, and the challenge is to make that matchup with what’s efficient. We’ll face the same challenge with tort law as well.Today, we begin tort law.The word tort is from French, and means injury. With contract law, we studied situations where someone injured you by breaking a promise they had made. With tort law, we willlook at situations where someone harmed you without having made any promises.A line I like from the Friedman book:“If someone shoots you, you call a cop. If he runs his car into yours, you call a lawyer.”The line between the two isn’t always that clear. Some torts are crimes as well – if someone assaults you, they may go to jail, and you may also sue them for damages. (Plus, there’s the OJ Simpson case.) We’ll get to criminal law in a few weeks; for now we’ll focus on the tort side.Before we get to the material, though, I’d like to do a quick experiment. As with nuisance law and contract law, our focus in torts will not be on fairness or equity,but on efficiency, that is, on structuring the law to provide correct incentives for people tobehave efficiently.- For deliberate harms, this will usually be fairly simple.- For accidental harms, though – traffic accidents and things like that – setting the correct incentive for avoiding harm is tricky.- Unlike in nuisance law, injunctive relief is often not an option- Much as we’d like to imagine that nobody could run into your car without negotiating for permission, it doesn’t work that way- Similarly, unlike with contract law, there is no promise or agreement made ahead of time; something happens, and then we deal with it.- Cooter and Ulen explain tort law as covering all the situations where transaction costs were too high to allow for bargainingo It’s impossible to negotiate with every driver for the right to hit youo it’s not always possible to bargain with an angry drunk about whether or not he breaks your nose.- Thus, Cooter and Ulen define the essence of tort law, at least economically, as the attempt to make injurers internalize the externalities they cause, in situations where transaction costs are too high to do this through property or contract rights.With contract law, we started out by discussing a “classic” legal theory of contracts (the bargain theory), and then moved on to an economic analysis. With torts, we’ll do the same.The traditional theory of tort liability was developed about 100 years ago. It specified three key elements of a tort, which must be present for he plaintiff to recover damages:- harm- causation- breach of dutyharm- First, and simplest, the plaintiff needs to have been harmed. - Without harm, there is no tort. - The book gives an example of a gas company that sold gas with a defective additive, which has no effect on cars with normal carburetors but is dangerous in cars with turbocharged carbs. - The owner of a car with a normal carburetor might be outraged by the situation, but since the gas did no damage to his car, he cannot sue.- Similarly, traditional tort theory does not compensate for exposure to risk. - Suppose a manufacturer accidentally exposed a bunch of workers to a chemical that doctors agree will cause 15% of them to develop liver cancer later in life.- Under traditional tort doctrine, the victims must wait and see who gets cancer before suing.- Similarly, if I do something negligent that causes you a 50% chance of dying, but you get lucky and escape the situation, I’m generally not liable for any damages.- (So far, U.S. courts have been reluctant to allow tort actions on the basis of exposure to harm, although some believe they should. Thus, safety regulation, administered by a government agency, is typically used instead of tort law to deal with exposure to low-probability harms.)In theory, harm has a simple economic interpretation: a downward shift in the victim’s utility. Like in the hairy hand case, we can imagine a victim has some utility function over health and money, with some sort of indifference curves:A car accident might lower both my wealth (because my car is worth less) and my health (because I got whiplash), moving me to a lower indifference curve.- Perfect compensation should restore me to my original level of utility.- Money damages are typically how this is done.- Obviously, some amount of money can get me back to my original level of wealth(by repairing whatever was broken on my car).- If there is medical care available that would restore me to my original level of health, then the cost of this treatment would get me back to my original level of health as well, so I’d be back where I started.- Of course, there are some harms that can’t be undone – the amputated leg in the experiment, or other permanent injury- but there may be some amount of money that would compensate for it, by getting me back to the same indifference curve I started out on.- Just like in the hairy hand case, we can work out perfect damages in this way.Health$So that’s the theory – the
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