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UW-Madison ECON 522 - Lecture Notes

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ECON 522 - DISCUSSION NOTES ON TORT LAW-1I TortsTort law deals with situations in which one party harms another, and transaction costs were too high to allowbargaining before the harm was done; e.g. car accidents.I.1 Remedies: Strict Liability vs. NegligenceThe two main types of remedies we will see for torts are strict liability rules and negligence rules:• Strict liability- The injurer is always liable for damage done.• No liability- The injurer is never liable for damage done.• Simple negligence- The injurer is liable for damages if the proper standard of care is not taken.Otherwise the injurer is not liable.Example. Snow Shoveling and Biking in the Winter. Suppose I own a house and it is my duty to shovelthe sidewalk when it snows. The cost to me of shoveling is $5, but it reduces the risk of a bike accidenton the sidewalk from 1/10 to 1/100. A biker can choose to wear a helmet or not wear a helmet. Wearing ahelmet costs a biker $3, but reduces the cost of an bike accident from $1000 to $500.1. What is the efficient level of precaution for me and the biker to take?2. What levels of precaution will the biker and I choose to take under a rule of no liability? Strictliability? Simple negligence?I.1.1 Activity LevelsIn the previous example, we not only have to worry about whether or not the biker wears a helmet, but alsowhether or not he chooses to bike at all. You can think of activity levels as a form of precaution. Under a noliability rule, the biker internalizes the full cost of biking, thus he bikes the efficient amount. However, undera strict liability rule, the biker does not internalize the full cost of biking (he imposes a negative externalityon me), and thus he bikes too much. This is exactly the same reason for why he chooses to wear a helmetunder a no liability rule, but to wear a helmet under strict liability1Example. Solutions.1. What is the efficient level of precaution for me and the biker to take? The following table showsthe expected social payoff given each combination of precaution. The efficient level of precautionis whatever maximizes social welfare, which in this example is that I shovel and the biker wears ahelmet.Shovel Don’t ShovelHelmet -5-3-(1/100)(500)=-$13 -3-(1/10)(500)=-$53No Helmet -5-(1/100)(1000)=-$15 -(1/10)(1000)=-$1002. What levels of precaution will the biker and I choose to take under a rule of no liability? Strictliability? Simple negligence?• No liability will result in (Helmet, Don’t Shovel). The underlined payoffs represent best re-sponses, the Nash equilibrium is when both actions are best reponses:Shovel Don’t ShovelHelmet -8, -5 -53, 0No Helmet -10, -5 -100, 0• Strict liability will result in (No Helmet, Shovel):Shovel Don’t ShovelHelmet -3, -10 -3, -50No Helmet 0, -15 0, -100• Simple negligence will result in (Helmet, Shovel):Shovel Don’t ShovelHelmet -8, -5 -3, -50No Helmet -10, -5 0, -100Under no liability, it is a dominant strategy for me not to shovel, since it provides me with no benefit, andfor the biker to wear a helmet. Under strict liability, it is a dominant strategy for the biker to not wear ahelmet and for me to shovel. Simple negligence mixes the incentives of these two rules so that it becomesa dominant strategy for me to shovel, and given that it is a best response for the biker to wear a helmet. Ingeneral this is how any negligence rules works: negligence rules mix incentives from the strict liability andno liability rules in order to create efficient


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UW-Madison ECON 522 - Lecture Notes

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