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UW-Madison ECON 522 - ECON 522 Lecture Notes

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Econ 522 – Lecture 20 (April 16 2009)Cooter and Ulen wrap up the chapter on torts with an empirical assessment of the tort system in the U.S.The general gist of their conclusion:- while critics claim that juries routinely hand out excessive rewards and that the tort system is out of control, it actually functions reasonably well- With the exception of occasional, well-publicized outliers, damage awards are generally not unreasonable- and liability has led to decreases in accidents in a variety of industries.- In the 1990s, tort cases passed contract cases as the most common form of lawsuit- Most tort cases are handled at the state levelo in 1994, 41,000 tort cases were resolved in federal courts, while 378,000 were resolved by state courts in the largest 75 counties alone.- Among these cases, most involve a single plaintiff (in contrast with contract cases, where many more involve multiple plaintiffs)Among the cases within the 75 largest counties in the U.S.,- about 60% had to do with auto accidents- about 17% were “premises liability”, for example, slip and falls in restaurants, businesses or government offices- about 5% were medical malpractice- about 3% were product liabilityPunitive damages are historically very rare- between 1965 and 1990, out of all product liability cases, punitive damages were awarded 353 times- the average award was $625,000 (in 1990 dollars), reduced to $135,000 on appeal, with average punitive damages only slightly higher (1.2 times) compensatory damages.Many states impose a limit on punitive damages, or impose a higher standard of evidencefor awarding them- In general, civil suits require a “preponderance of evidence,” which is generally interpreted as anything over 50% certainty- In some states, punitive damages require “clear and convincing” evidence, a higher standard, though still lower than the “beyond a reasonable doubt” standard used in criminal law.)- 1 -Cooter and Ulen give a few scary statistics about medical malpractice- a study in New York in the 1980s found 1% of hospital admissions involved serious injury due to negligent care- some estimates suggest that “defensive medicine” – procedures undertaken purelyto prevent possible lawsuits – account for 5% of total health care costs- A number of states have considered caps on damages that can be awarded for medical malpractice, although in some cases, these rules have had the opposite effect as intended.Cooter and Ulen cite a recent product liability survey of CEOs finding that “liability concerns caused 47% of those surveyed to drop one or more product lines, 25% to stop some research and development, and 39% to cancel plans for a new product.”The liability standard in many product-related accidents is “strict products liability”, which holds that a manufacturer is liable if the product is determined to have been defective. This can take three forms:- a defect in design – as in cases where the design of a car’s gas tank made it liable to explode- a defect in manufacture – a bolt is left off a lawn mower during assembly, or nottightened all the way; a piece flies off and injures a user- a defect in warning – the manufacturer fails to warn consumers about the dangers the product poses- One might expect precaution to be pretty unilateral – the manufacturer designs and builds the product – and so a strict liability rule might make sense- However, there are elements of bilateral precaution- People get injured turning their lawnmowers sideways to trip hedges.- C&U suggest holding manufacturers strictly liable for defective design, manufacture, or warnings, but not liable when victims misuse the product or “voluntarily assume the risk of injury”- (This is strict liability with a defense of contributory negligence)- (Basically, holding the manufacturer liable in these cases means forcing them to provide insurance for their customers, which is probably inefficient.)They discuss attempts to reform product liability laws, in response to rising rates for liability insurance; some states put caps on damages. They give some unconvincing numbers, but point out that product-liability insurance costs are on the order of a quarter of a cent for each dollar of purchase price, which doesn’t seem all that problematic.As I mentioned the other day, if you’re interested, the paper by Schwartz spends some time looking at evidence of the effect of tort law – that is, how actual accident rates have responded to changes in liability rules – in a number of different industries.- 2 -vaccines- Recall a silly example from several lectures ago:- I stop a friend to chat in the street, he later gets hit by a falling safe that wouldn’t have hit him if we hadn’t talked- In a sense, I caused his death- but I didn’t raise the ex-ante probability of it happening (I was as likely to cause him to miss the safe as to get hit by it), so I shouldn’t be held liable.- Liability for vaccines is sort of an analogous situation- Many vaccines for diseases are based on a weakened version of the disease itself, causing your body to develop a natural immunity to it.- Thus, while they make you much less likely for you to acquire the disease, there is usually a very slim chance of contracting the disease directly from the vaccine.- For example, the Sabin polio vaccine, which replaced the weaker Salk vaccine and basically wiped out polio, also causes 1 out of every 4,000,000 people who receive the vaccination to contract polio.- A 1974 case established that the maker had to warn its consumers about this risk; since then, vaccines always come with warnings about the risks.- Since then, however, a couple of people have been awarded damages after their children developed polio from the vaccine.- If liability cannot be avoided through due care and warnings, it ends up being built into the cost of the drug.- Worse, it discourages companies from developing beneficial vaccines.- The book gives a couple of examples – a 1976 outbreak of swine flu, and a more recent shortage of a vaccine against whooping cough – where a company refused to market a vaccine because it could not get liability insurance.- In the first case, the government stepped in, basically ordering the company to produce the vaccine and assuming liability for itself.- 3 -Cooter and Ulen wrap up with a brief discussion of mass torts – situations where many people have been harmed in the same way, by the same


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UW-Madison ECON 522 - ECON 522 Lecture Notes

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