Transcript TRIAL

Part D-II
The Economics of Tort Law
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Objectives

Setting legal standards

Errors
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Setting legal standards
Recall that all of the tort rule ‘efficiency’ results rely
on the courts being able to set the legal standard
of care (x’) at the efficient level of precaution
(x*).
But how do courts actually determine the legal
standard of car (x’) and does it approximate the
efficient level of precaution (x*) in a given case?
The range of accidents considered by courts is vast.
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Setting legal standards
A. Reasonable care, reasonable person, unwritten social
norms, community standards
B. Professional standards, codes of ethics, standards of
practice
C. Laws and regulations (speed limits, fire regulations, health
and safety regulations)
D. The Hand rule
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Setting legal standards – the Hand rule
The Hand Rule (Unites States v. Carroll Towing Co 1947): The
injurer is negligent if the costs of the precaution that could
have been ‘purchased’ is less than the resulting benefit (the
reduction in the cost of harm that it yields).
The model: let
p
L
B
= probability of a fatal accident (our p(xv,xi))
= the monetary value of the loss if an accident
occurs (our A)
= cost (burden) of the additional precaution (our w or
wx?)
If B <= pL then the injurer should have made the effort
and if the injurer did not ‘buy’ B, then he/she is liable.
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Example: A farmer’s cattle sometime wander unto a local
road. If a car hits a cow, the average cost of an accident is
$75,000. The probability of an accident over the next ten
years is 0.05. The cost of building and maintaining a fence
over the next ten years is $2,500
Then, B = $2,500 and pL = (0.05*$75,000) = $3,750
so that B < pl
If the farmer does not build the fence and an accident
happens, then under Hand’s rule he will be found to have
been negligent and will be liable.
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American courts regularly apply the Hand rule. If
we think in marginal terms, then
p
L
B
= -Δp/Δxi
=A
= wi
and the Hand rule becomes: if wi <= -Δp/Δxi A,
then the injurer should have made the
‘expenditure’ or she will be liable were an
accident to occur. This is our efficiency rule.
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Errors
Not surprisingly, if courts make errors in finding
liability or assessing damages, then this might
affect behaviour
This notion of ‘errors’ implies that they are
systematic, in one direction and not likely to be
corrected. If they are truly random ‘errors’ the
analysis is different (i.e. expected values would
be the same).
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Errors
Under Strict Liability
Systematic court errors in assessing damages cause
the potential injurer’s optimal precaution to
respond in the same direction.
Systematic court errors in failing to hold an injurer
liable will cause the potential injurer to take less
precaution.
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Errors
Under Strict Liability
If court awards excess damages potential
injurers will take excessive precaution
$
Where Aerr > A
wi xi + p(x’v, xi)Aerr
wi xi + p(x’v, xi)A
wi xi
p(x’v, xi)Aerr
p(x’v, xi)A
0
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x*i
xerr
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xi
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Errors
Under a Negligence Rule
Since there is a discontinuity at the optimal level of
precaution, a potential injurer’s behaviour is not
affected by modest systematic court errors in
assessing damages.
BUT
A a potential injurer’s level of precaution will
respond directly to systematic court errors in
determining the ‘legal standard of care’
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Errors
Under a Negligence Rule
If court awards insufficient or excess damages potential
injurer’s behaviour will not be affected - discontinuity
Forbidden zone xi < x’i
Permitted zone xi > x’i
$
wi xi + p(x’v, xi)A
wi xi + p(x’v, xi)0.7A
wi xi
Gap
0
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x’i
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xi
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Errors
in Setting ‘Standard of Care’
The potential injurer (or victim under other than a
simple negligence rule) will set their maximizing
level of precaution equal to the standard of care,
whether it is correct or not.
As long as they meet the standard of care they are
not liable and that is their objective
E.g. professional colleges with lax standards
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Errors
in Setting ‘Standard of Care’
Potential injurer will choose xi = x’err
negligent xi < x’i
non-negligent xi > x’i
$
wi xi + p(x’v, xi)A
wi xi
wi x’i
wi xerr
0
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x’err
x’i
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xi
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Errors
in Setting ‘Standard of Care’
Potential injurer will choose xi = x’err
negligent xi < x’i
non-negligent xi > x’i
$
wi xi + p(x’v, xi)A
wi xi
wi xerr
wi x’i
0
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x’i
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x’err
xi
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