ECP3451 Final exam study guide Breach of Duty a Harm 1 Classic Theory of Torts like bargain theory 3 parts Harm Causation i Perfect Compensation restores victim to original level of well being Generally through money damages 1 Includes tangible intangible harms 1 But for the defendant s actions would the harm 1 Immediate cause The defendant s action can t be ii Cause in fact have occurred iii Proximate cause too distant from harm iv Tangible harms 1 Medical costs 2 Lost income 3 Damaged property v Intangible harms 1 Emotional harm 2 Pain suffering 3 Loss of companionship b Causation i Strict Liability plaintiff must prove ii Negligence plaintiff must prove 1 Harm 2 Causation 1 Harm 2 Causation 3 Breach of Duty c Breach of Duty i Standard of care 1 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 regulations i Government sets standards b Some standards are vague reckless driving 2 Liability rules a No liability i b Strict Liability i Injurer does not have to pay for accidents Injurer pays damages for any accidents he causes 1 Injurer bears costs of accidents plus his own precaution ii No incentive for victim for precaution c Simple negligence Injurer has taken precaution and is not liable i ii Victim bears costs of any accidents iii d Strict liability with a defense of contributory negligence Injurer owes nothing if victim was also negligent Injurer is liable unless victim is also negligent i ii e Activity levels for all of the above i Take precaution only to AVOID liability 1 If precaution level is efficient then activity level is too high ii To reduce accidents since he bears the cost 1 Precaution and activity levels are both efficient f Precaution levels for all of the above i Any of the above with efficient standard of care will lead to efficient precaution by both parties 3 When the injurer is a business a Accidents between businesses and strangers i To avoid possibility of a liability injurer must exercise due care b Strict liability v negligence taxi driver example i Strict liability Drivers pay for accidents cost of accidents is built into price of a ride 1 Take precaution ii Negligence Drivers still take precaution to avoid liability 1 Risk of accidents shared with customers 4 Accidents between business and their customers shellfish restaurant 2 Price of ride does not include cost of accidents example a Strict liability i Sellers bear costs of accidents 1 Efficient precaution a make sure shellfish isn t rotten ii Sellers bear residual risk 1 Expected cost of accidents built into prices iii 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 restaurant to make sure and deliver a quality meal b Negligence i Restaurants take efficient precaution to avoid liability 1 But since they avoid liability cost of accidents not built into prices ii If customers perceive risk accurately no problem 1 But if they don t perceive the risk then they ll demand inefficiently too much c No liability i IF customer correctly judges risk 1 Restaurants take efficient precaution to attract customers 2 Customers demand efficient number of meals ii IF customers can only judge average level of risk 1 Restaurants take no precaution 2 IF customers know this they would demand an efficiently low number of meals iii If customers are oblivious to risk 1 Restaurants take no precautions 2 Cost of bad meal food poisoning not built into 3 Customers demand inefficiently high number of prices meals 5 Standard of care 6 Information a Random mistakes a Hand rule i 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 benefit ii Hand Rule negligent if you didn t take it If a precaution is efficient then you re b Strict liability v negligence i Negligence rules lead to efficient precaution by both sides 1 Hard to determine standard of care needed to prove negligence ii Strict liability leads to efficient activity level by injurer i Damages could be set too high or too low but on average ii So the damages rewarded are randomly incorrect i Damages are set incorrectly on average consistently too are correct b Systematic mistakes high or too low i Strict liability c Strict liability v negligence for Random mistakes 1 No effect on incentives 2 Efficient level of precaution and activity ii Negligence 1 Increased injurer precaution 2 People don t like uncertainty d Strict liability v negligence for Systematic mistakes i Strict liability 1 Will skew injurer incentives a Damages too low injurer will inefficiently b Damages too high injurer will overly precaution precaution ii Negligence for systematic mistakes 7 Administrative Costs 1 No effect a Negligence cases lead to longer more expensive trials i It is harder to prove harm causation breach of duty 1 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 Uncertainty a Given standard level of xn b And level of precaution x uncertainty as to whether the court will determine negligence c Causes over precaution 9 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 events 1 Risk aversion and preference reversal a The Lotto example he did in class b 25 chance of 2 000 or 50 chance of 1000 1 chance of 200 or 2 chance of 100 c d The odds are the same statistically either way But the first one is more appealing although it is irrational to prefer that ii Injurers pay damages in full 1 Strict liability 2 BUT if harm done exceeds what injurer can pay a Injurer whose liability is limited by bankruptcy is called judgement proof 3 This is sometimes the case iii No regulation 1 Regulations supply additional incentive to take precaution 2 Regulations which require efficient