Econ 522 Economics of LawSlide 1The law as incentives – HW2 Q3 (from old midterm)If we think about payoffs after the fact (after accident, after treatment)…So what is the right way to think about the problem?Something to rememberSlide 6Monday…PrecautionSlide 10Model of unilateral harmSlide 12Slide 13Slide 14Slide 15Slide 15Effect of liability rules on precautionRule 1: No LiabilityRule 1: No Liability Injurer precautionRule 1: No Liability Victim precautionSlide 21Rule 2: Strict LiabilityRule 2: Strict Liability Injurer precautionRule 2: Strict Liability Victim precautionSlide 25So for accidents with unilateral precaution…Rule 3: Simple NegligenceRule 3: Simple Negligence Injurer precautionRule 3: Simple Negligence Victim precautionSlide 30For bilateral precaution, there are several ways to implement a negligence ruleDifferent negligence rulesSlide 33Here’s the cool part…Discrete example of bilateral precautionNegligence with a Defense of Contributory NegligenceComparative NegligenceStrict Liability with a Defense of Contributory NegligenceSo even with bilateral precaution…(I mentioned, with bilateral precaution, things occasionally get more complicated…)So far, our results seem to favor negligence rules…Econ 522Economics of LawDan QuintSpring 2010Lecture 162The law as a setof incentives3A physician comes upon an auto accident, stops, and treats an unconscious and badly bleeding victim. A week later the victim receives a bill for services rendered. Must he pay it?Under current U.S. law the answer is yes.Consider the following alternatives:i. The victim need not pay anythingii. The victim must pay only the value of whatever materials were used up in treating him (bandages, etc.)iii. The victim must pay the going market rate for comparable medical servicesiv. The victim must pay whatever the doctor demandsWhich of these do you expect to lead to the most efficient outcomes? Why?The law as incentives – HW2 Q3(from old midterm)4If we think about payoffs after the fact(after accident, after treatment)…Suppose value of treatment is $100,000, cost of materials $50, value of doctor’s time $450, market rate $1,000After the fact, all remedies are equally efficientSo this can’t be the right way to think about the problem!99,50099,50099,50099,500Combined Payoffs999,500500-450-500Doctor’s Payoff-$900,000$99,000$99,950$100,000Patient’s PayoffWhatever Doc AsksMarketRateCost of MaterialsPayNothing5Need to think about incentive each rule creates, therefore the behavior it will lead toPatient pays nothingPatient pays for materialsPatient pays market ratePatient pays whatever doctor asksSo what is the right way to think about the problem?6Something to rememberdistributionbut notefficiencyefficiency7Back totort law8Elements of a tortHarm; causation; breach of duty (negligence)Strict liability: no need to prove negligence, just harm and causationNegligence: need to prove all three elementsPrecaution: any actions taken to reduce likelihood of an accidentToday: economic model of tortsMonday…9The more carefully I drive, the less likely I am to hit youBut, driving more carefully is also more costly to meMust be some efficient level of carePrecaution10The more carefully I drive, the less likely I am to hit youBut, driving more carefully is also more costly to meMust be some efficient level of careWhat determines how carefully I drive is what I think will happen if I hit youTort law creates incentivesWe ended Monday with two questions:What is the efficient level of precaution?How do we design the law to achieve it?Like with nuisance and contract law… easiest way is to design the law so that I internalize the externality I cause when I hit youPrecaution11Unilateral harm – just one victimPrecaution – costly actions that make accident less likelyCould be taken by either victim or injurerWe’ll focus on one at a timeNotationx – the amount of precaution that is takenw – the cost of each “unit” of precautionso total cost of precaution is wxp(x) – probability of an accident, given precaution xp is decreasing in xA – cost of accident (to victim)so expected cost of accidents is p(x) AModel of unilateral harmx level of precautionw marginal cost of precautionp(x) probability of an accidentA cost of an accident12Model 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)13efficient precaution: minx { wx + p(x) A }w + p’(x) A = 0w = – p’(x) AUnder reasonable assumptions (p(x) convex)…x < x* w < – p’(x) AMSC < MSB more precaution efficientx > x* w > – p’(x) AMSC > MSB less precaution efficientx = x* MSC = MSBModel of unilateral harmx level of precautionw marginal cost of precautionp(x) probability of an accidentA cost of an accidentmarginal social cost of precautionmarginal social benefit of precaution14Model of unilateral harmx level of precautionw marginal cost of precautionp(x) probability of an accidentA cost of an accidentx$p(x) Awxwx + p(x) Ax*x < x* x > x*15We haven’t yet said who is taking precautionSome situations, only injurer can reduce accidentsSome situations, victim can tooBilateral precaution is a little bit tricky, but if we look at the two parties one at a time, everything works fineNext: consider effect of different liability rules on precautionModel of unilateral harm16Effect of Liability Ruleson Precaution17Three rules we’ll consider:No liabilityStrict liabilityNegligenceEffect of liability rules on precaution18In a world with no liability…Victim bears the cost of any accidents, plus the cost of any precaution he takesInjurer bears cost of any precaution he takes, does not have to pay for accidentsRule 1: No Liability19Rule 1: No LiabilityInjurer precautionx$p(x) Awxwx + p(x) Ax*Injurer’s private cost is just wxInjurer minimizes private cost by setting x = 0Private cost to injurer20Rule 1: No LiabilityVictim precautionx$p(x) Awxwx + p(x) Ax*Victim’s private cost is wx + p(x) ATo minimize this,
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