Econ 522 – Lecture 16 (Nov 6 2008)Tuesday, we began tort law- Defined the three elements of a tort under the traditional theory – harm, causation,and breach of duty (not always required)- Defined a strict liability rule as one which assigns liability based only on harm and causation, and a negligence rule as one which requires all three elements- That is, under strict liability, you’re responsible for any damage you do; under negligence, you’re responsible for any damage you do if you were being careless (if you breached the duty of due care)- We introduced a simple model of unilateral precaution, where one party (maybe the injurer, maybe the victim) chooses ahead of time how much precaution to take, where the more precaution is taken, the lower the likelihood of an accident- Letting x denote the level of precaution, p(x) the probability of an accident, A the cost of an accident, w the marginal cost of precaution:- We said efficiency requires minimizing total social cost, which is wx + p(x) Ao add it to the graph- We said that when there is no liability, the victim bears the full cost of accidentso This leads to efficient levels of precaution when it’s victim precautiono But inefficiently low precaution when it’s injurer precaution- In contrast, when there is strict liability (with perfect compensation), the injurer internalizes the cost of his actionso Leads to efficient precaution when it’s injurer precautiono But now victim does not bear cost of accidents, so inefficiently low precaution when it’s victim precautionprecautionp(x) AwxWe can sum up the results so far:Legal Rule Victim’s Precaution Injurer’s PrecautionNo liability Efficient ZeroStrict liability Zero Efficient- So like with the paradox of compensation in contract law, we haven’t yet found a single rule that sets incentives correctly for every situation.- But in tort law, there is a trick- We defined a negligence rule, under which the injurer is liable for harm only if hedid not take certain precautionso We can make damages depend not only on whether an accident occurred, but also on the actions that led up to ito This may allow us to get both incentives right.Case 3: Negligence RuleA negligence rule says that the injurer is liable for damages if his precaution level was below the legal standard of care, x~. So for x < x~, damages would be D = A; for x >= x~, damages would be D = 0.If we go back to the graphs we drew earlier, then, the total expected cost to the injurer (from both precaution and expected damages) will bewx + p(x) Afor x < x~, and just wx for x >= x~, since when x >= x~, the injurer is not liable for damages.How this actually looks will depend on how x~, the legal standard for precaution, relates to x*, the efficient level of precaution. For now, let’s assume they’re equal, that is, x~ = x*.The dark-shaded curve is the injurer’s expected private costs under a liability rule, when x~ = x*:At x < x*, we know that wx + p(x)A is decreasing; and so the injurer’s expected costs are decreasing. Similarly, we know that wx is increasing, so above x*, the injurer’s expected costs, which are just wx, are increasing. So expected costs are minimized by setting x = x*, the efficient level.So a negligence rule, with a legal standard of care x~ equal to the efficient level x*, leads to an efficient level of injurer precation.What about the victim’s incentives?The victim knows that under a negligence rule, the injurer will take precaution x*; and therefore, if an accident occurs, the injurer will not be liable. So now the victim is facing the full cost of any accident which occurs; which means that the victim also takes the efficient level of precaution.So now we’ve found a solution to the “paradox of compensation”:A negligence rule, combined with an efficient legal standard for care, leads to efficient precaution by both injurer and victim.Which is pretty cool.So we can add another row to our table of results from before:precautionwxwx + p(x) Ax~ = x*Legal Rule Victim’s Precaution Injurer’s PrecautionNo liability Efficient ZeroStrict liability Zero EfficientNegligence, x~ = x* Efficient EfficientThis works great for cases of unilateral precaution – when in each situation, only one party has a way to reduce the risk of accidents. It also works pretty well in cases of bilateral precaution.However, in cases of bilateral precaution, there are several different ways to implement a negligence rule. The one that we have seen so far is called simple negligence. Under a simple negligence rule, the injurer is liable if his level of precaution, xi, was below the legal standard, xi~; if it was above xi~, he is not liable. And that’s the whole story. (What the victim was doing doesn’t matter.)Under a different rule, however, a negligent injurer can escape liability if the victim was also being negligent. For example, if I’m driving carelessly (talking on my phone, changing CDs) and hit someone, I may be liable; but if I can show that the guy I hit was drunk, and stumbled into the street right in front of me, his negligence cancels out mine and I don’t owe him damages. This type of rule is callednegligence with a defense of contributory negligenceUnder this rule, if the injurer took insufficient precautions, xi < xi~, and the victim took sufficient precautions, xv >= xv~, then the injurer is liable for damagesHowever, if the injurer took sufficient care, xi >= xi~; OR the injurer was negligent, xi < xi~, but so was the victim, xv < xv~, then the injurer is not liable for damages.Like simple negligence, a rule of negligence with a defense of contributory negligence (with standards of care equal to their efficient levels) leads to efficient precaution by bothparties. The injurer expects the victim to take the efficient precautions, xv = xv~; so he knows that if he takes insufficient care, xi < xi~, he’ll be liable, and if he takes sufficient care, xi >= xi~, he will not be; so he minimizes expected costs by setting xi = xi~ = xi*.The victim, on the other hand, expects the injurer to take efficient precautions, so he expects to receive no damages, whether or not he himself is negligent; so he sets the efficient level of care, xv = xv*.A third type of rule holds that if both parties are negligent and an accident occurs, then since they share the blame, they should share the responsibility. This is referred to as comparative negligence.- If
View Full Document
Unlocking...