ECP3451 Final exam study guide1. Classic Theory of Torts: like bargain theory (3 parts: Harm, Causation, Breach of Duty)a. Harmi. Perfect Compensation: restores victim to original level of well-being. Generally through money damages1. Includes tangible & intangible harmsii. Cause-in-fact1. But for the defendant’s actions, would the harm have occurred?iii. Proximate cause1. Immediate cause. The defendant’s action can’t be too distant from harmiv. Tangible harms1. Medical costs2. Lost income3. Damaged propertyv. Intangible harms1. Emotional harm2. Pain & suffering3. Loss of companionshipb. Causationi. Strict Liability: plaintiff must prove:1. Harm2. Causationii. Negligence: plaintiff must prove:1. Harm 2. Causation3. & Breach of Dutyc. Breach of Dutyi. Standard of care1. Is the care that you must take for your property to prevent harm.2. Negligence if you know you should care for your property, but fail to do so.3. Standard of care determined by:a. Safety regulationsi. Government sets standards b. Some standards are vague (reckless driving)2. Liability rules a. No liabilityi. Injurer does not have to pay for accidentsb. Strict Liabilityi. Injurer pays damages for any accidents he causes1. Injurer bears costs of accidents, plus his own precautionii. No incentive for victim for precautionc. Simple negligencei. Injurer has taken precaution, and is not liableii. Victim bears costs of any accidentsiii.d. Strict liability with a defense of contributory negligencei. Injurer owes nothing if victim was also negligentii. Injurer is liable unless victim is also negligente. Activity levels for all of the abovei. Take precaution only to AVOID liability1. If precaution level is efficient, then activity level is too highii. To reduce accidents, since he bears the cost1. Precaution and activity levels are both efficientf. Precaution levels for all of the abovei. Any of the above (with efficient standard of care) will leadto efficient precaution by both parties3. When the injurer is a businessa. Accidents between businesses and strangersi. To avoid possibility of a liability, injurer must exercise duecareb. Strict liability v. negligence (taxi driver example)i. Strict liability: Drivers pay for accidents, cost of accidents is built into price of a ride1. Take precautionii. Negligence: Drivers still take precaution to avoid liability1. Risk of accidents shared with customers2. Price of ride does not include cost of accidents4. Accidents between business and their customers (shellfish restaurant example)a. Strict liability i. Sellers bear costs of accidents 1. Efficient precautiona. (make sure shellfish isn’t rotten)ii. Sellers bear residual risk:1. Expected cost of accidents built into pricesiii. So even if customers don’t accurately perceive risk, the price leads them to make an efficient choice.1. (price of shellfish includes the cost of the restaurantto make sure and deliver a quality meal)b. Negligencei. Restaurants take efficient precaution to avoid liability1. But since they avoid liability, cost of accidents not built into pricesii. If customers perceive risk accurately, no problem1. But if they don’t perceive the risk, then they’ll demand inefficiently too muchc. No liabilityi. IF customer correctly judges risk1. Restaurants take efficient precaution to attract customers2. Customers demand efficient number of mealsii. IF customers can only judge average level of risk1. Restaurants take no precaution2. IF customers know this, they would demand an efficiently low number of mealsiii. If customers are oblivious to risk1. Restaurants take no precautions2. Cost of bad meal (food poisoning) not built into prices3. Customers demand inefficiently high number of meals5. Standard of carea. Hand rulei. Failure to take precaution constitutes negligence if:1. (cost of precaution) < (cost of accident)(probability of accident)2. So a particular precaution is required to avoid liability if it is cost-justified – its cost is less than its benefitii. Hand Rule : “If a precaution is efficient, then you’re negligent if you didn’t take it.”b. Strict liability v. negligence i. Negligence rules lead to efficient precaution by both sides1. Hard to determine standard of care needed to prove negligenceii. Strict liability leads to efficient activity level by injurer6. Informationa. Random mistakesi. Damages could be set too high or too low, but on average are correctii. So the damages rewarded are randomly incorrect b. Systematic mistakesi. Damages are set incorrectly on average – consistently too high or too lowc. Strict liability v. negligence for Random mistakesi. Strict liability1. No effect on incentives2. Efficient level of precaution and activityii. Negligence1. Increased injurer precaution2. People don’t like uncertaintyd. Strict liability v. negligence for Systematic mistakesi. Strict liability1. Will skew injurer incentivesa. Damages too low, injurer will inefficiently precautionb. Damages too high, injurer will overly precautionii. Negligence for systematic mistakes1. No effect7. Administrative Costsa. Negligence cases lead to longer, more expensive trialsi. It is harder to prove harm, causation, & breach of duty1. Remember that for strict liability, you must only prove harm & causation. But with negligence, you must also prove breach of duty (which is harder to prove)ii. Negligence would lead to fewer trials 1. Not every victim would have a case, since not every injurer is negligent.b. In the end, it is unclear which system would be ultimately cheaper (strict liability or negligence)8. Evidentiary Uncertaintya. Given standard level of xnb. And level of precaution x, uncertainty as to whether the court will determine negligence c. Causes over-precaution9. Relaxing classic assumption (the following are all assumptions of classic model. The bullets under are how these assumptions are violated)i. Rationality: assumption #1. People seem to overestimate chance of unlikely events with well-publicized, catastrophic events1. Risk aversion and preference reversal:a. The Lotto example he did in classb. 25% chance of $2,000 or 50% chance of $1000c. .1% chance of $200 or .2% chance of $100d. The odds are the same, statistically, either way. But, the first one is more appealing although it is irrational to prefer thatii. Injurers pay damages in full1. Strict liability. 2. BUT if harm done exceeds what injurer can paya. Injurer whose liability is limited by bankruptcy is called