week 5 - tort law

Question 1

define efficiency

Answer 1

efficiency means maximizing total suprlus realized by everyone in society.

• this means that scarce resources are allocated to those who value them the most, and actions are only taken if social benefit outweighs social cost

Question 2

People act and make decisions based off of self interest, not social goals. So - how should rules be designed to achieve efficiency?

Answer 2

rules should be designed in a way that aligns with self itnerest with efficient outcomes

Question 3

What is the Coase theorem

Answer 3

• outlines an ideal world where there are no transaction costs
• argues that if property rights are clearly define and there are no transaction costs, when people negotiate freely they will always reach the most efficient outcome through bilateral negotiation - so the initial legal rule does not matter
• If there are transaction costs, the legal rule matters as it influences the efficiency level of the outcome, meaning a certain rule may lead to an efficient outcome, whilst another rule may lead to an inefficient outcome.
• Legal rules should be designed to minimize transaction costs, and allocate rights as efficiently as possible

Question 4

What is property law?

Answer 4

• defines + assigns rights => decides who owns what
• start of how resources are allocated
• assumes that when property rights are clear, people can trade whoever they like
• thus an important aspect is the voluntary exchange / trade of goods (same as in contract law)

Question 5

What is contract law?

Answer 5

• governs the voluntary exchange of rights over time, enforces promises
• • allows for non-simultanous exchange of goods (i pay now, recieve later).
• promise enforcement helps reduce risks createde by time gaps in the contract
• an important aspect is the voluntary exchange of goods / trade (same as in porperty law)

legal focus; contract formation, validity, remedies

Question 6

What is tort law?

Answer 6

• addresses wrongdoings that one can be compensated for that DONT arise from contract or property law
• ex. car accidents, defamation (false statements that harm someones reputation), defective products
• an important aspect is the involuntary exchange of goods

Question 7

what is a tort

Answer 7

A tort is a civil wrong that causes harm to a person or property

Question 8

What is tortious liability?

Answer 8

= Liability that arises when a person breaches a legal duty imposed by law, resulting in harm to another, and is held responsible through a civil claim for damages.

so;
- arises from a breach of a duty that is not based on a contract (ex. duty to drive carefully)
- the duty that was breached is fixed by law / imposed by the legal system
- the duty is owed to the general public
- the breach is redressable by an action for unliquidated damages (aka the breach can be corrected through financial compnesation where the amount is not pre-determined)

Question 9

What are three types of torts?

Answer 9

1) Intentional Torts - deliberate acts that cause harm ex. assault
2) Tort of Negligence - harm caused by failure to exercise reasonable care ex. car accidents
3) Strict Liability Torts - liability imposed regardless of faults ex. when a product is defective

Question 10

What is the main economic question we ask when assessing tort law?

Answer 10

How can tort law be structured in a way that incentivizes people to behave in a way that leads to an efficient outcome?

Question 11

what is the role of tort law? what does it achieve?

4 points

Answer 11

• high transaction costs prevent bilateral negotiations, so the legal system intervenes via tort law to achieve efficiency and fairness
• tort law regulates externalities caused by our actions
• tort law incentivizes the internalization of such externalities (causes ppl that cause harm to actually pay for it) - thus it makes injurers bear the social costs

so
(1) achieves efficiency when bilateral negotiations dont
(2) regulate externalities
(3) incentivize internalization of externalities
(4) make injurers bear social costs

Question 12

What are the 3 main elements of a tort?

Answer 12

1) a fault (breach of a duty)
2) harm
3) causation (when a defendants act causes harm)

note; dif liability rules require the precence of dif elements ex. strict liability does not require causation, but negligence requires all 3

= these are the building blocks of the economic analysis of tort law

Question 13

look at graph A week 5 tort law;
- What does the graph show?
- What does U mean?
- What is U1 vs U0?
- what is the goal of tort law from an economic perspective?

Answer 13

U = Utility
- it is a measure of satisfaction / well being, that is based on health levels and wealth levels.

The Utility Curve indicates how much health + wealth is needed in order to be satisfied. Every point on the curve indicatse the same level of satisfaction, that can be achieved in dif ways;
- The healthier someone is, the less wealth they need.
- The wealthier someone is, the less health they need. and vice versa

When both health and wealth are high, the utility curve rises and moves up, when they are low, it decreases and moves down.

curve shift;
- U0 = this is the utility curve of a person BEFORE a tort occured. The utility curve is high
- U1 = this is the utility curve of a person AFTER a tort occured. - - The utility curve moves down as the persons overall utility decreases due to injury - both health and wealth are decreased.

The goal of tort law is to give the injured person the same level of well being that they had before the tort had occured, and bring them back to the original curve (U0)

Question 14

look at graph A week 5 tort law;
After a tort is committed, how can it be resolved based on the graph?

Answer 14

After a tort is committed, the utility curve drops from H1 to H0. Thus, we must increase it to get it back to H1. This can be doen by increasing health or wealth, however, we cannot increase ones health - we can only increase wealth. Thus we increase wealth (vertically line up to U0), and the health level stays the same. We increase wealth enough to the point that satisfaction is the same.

IF you COULD restore ones health, you would - in this case you’d move horizontally until U0 is reached.

This is an example of perfect compensation which is the economic ideal.

Question 15

What is the economic model of accidents?

Answer 15

• it is a model used to analyze how to minimize social costs of accidents in society (which is the goal)

the aim of the model is to find an optimal level of precaution where the total expected social cost is minmized (ex ante approach)

apparently basede on calabresi + posner???

Question 16

What are two main types of costs incurred in a tort?

Answer 16

a) cost of precaution of harm
b) cost of expected harm

Question 17

What is the cost of precaution

Answer 17

the expenses incurred to prevent accidents from happening ex. installing safety equipment, training inspections, etc.

Question 18

What is the cost of expected harm?

Answer 18

anticipated cost of the accident
- aka if an accident does occur, it will most prob cost this much

Question 19

What is the expected social cost of an accident?

Answer 19

= the cost of precaution + the cost of expected harm

Question 20

the cost of precaution + the cost of expected harm = ____

Answer 20

the cost of precuation + cost of expected harm = total social cost

Question 21

p(x)A + wx = total social cost

• what does each letter show?

Answer 21

p(x) = probability of accident
x = level of precaution taken
A = actual cost of accident
w = marginal cost of precuation (aka the cost of one extra unit of safety)

Question 22

minimizing social costs of accidents

look at w5 graph B:
- explain the graph
- what does x* mean?

Answer 22

X* indicates the efficient level of precaution where total social cost is minimized
- it is the point where marginal cost = marginal benefit
- it is therefore the optimal point where the perfect amount of precaution is taken (not too high = too expensive, and not too low = high accident cost)

Question 23

What is the optimal / most efficient level of precuation?

Answer 23

when marginal cost = marginal benefit is the optimal point of precaution, where the level of precaution taken is not too low or too high

• if too low = accidents rise
• if too high = precaution is too expensive

so x* = p(x*)A

shows most efficient level of precaution

Question 24

Does the way the money that must be paid after an accident impact the social cost?

for example;
- There is an accident resulting in 1k in damages, Ross and Chandler are both involved.
- Scenario 1: Ross pays 1k in damages, Chandler pays nothing
- scneario 2; Ross pays nothing, Chandler must pay 1k in damages
- scenario 3; Ross pays 50k, Chandler recieves 49k in compensation from ross

What is the combined pay off in all scenarios?

Answer 24

The way that money is distributed after an accident does NOT impact the social cost, regardless of how the damages are paid for - the combined pay off / social cost will always be the same.

SO in all three scenarios, the total social cost is -1k

Even in scenario 3 where Chandler recieves compensation from Ross, even tho Ross paid 50k - Ross only recieved 49k, as the 1k went towards covering the damages

Question 25

Knowing that the social cost of an accident does not change based on how the money is distributed - which is impacted by liability rules. So liability rules do impact who pays for the damage. What impact does this have on law and policymaking?

Answer 25

1) after an accident occurs the loss is unaviodable SO it is most efficient to create policies that focus on PREVENTION and avoiding accidents as a whole, not only adjusting who pays after they already occur 2) How the law assings liability affects our behaviour BEFORE the accident 3) efficiency is not about BALANCING total costs, in this case it is about MINIMIZING total social costs

Question 26

**What are the three main liability rules?**

Answer 26

1. no liability 2. strict liability 3. simple liability

Question 27

What is No Liability?

Answer 27

It means the injurer is not held responsible for any damages caused by the accident

Question 28

What is Strict Liability?

Answer 28

when the injurer is ALWAYS held liable for any accident caused (even if there was no intent) ex. product sold randomly explodes

Question 29

What is simple negligence?

Question 30

Explain what happens if a no liability rule is followed in the case of an accident? - What incentive does the injurer have to pay for precaution costs? - What incentive does the victim have to pay for precaution?

Answer 30

No liability means the injurer is not held responsible for any accidents caused by the accident; - The injurer is incentivized to NOT pay for precaution for the victim, as if the victim gets injured, the injurer will not bear the costs of the accident. - the victim is incentivized to pay for prevention as they will incur all costs in case of an accident, = so the victim bears the cost of prevention and the accident, so he'll have ot pay p(x)A + wx => thus his cost. minimizing choise is x = x*

Question 31

Does the rule of no liability lead to an efficient precaution taken on by the victim, injurer or both?

Answer 31

The rule of no liability leads to an efficient precaution taken on by the victim as they bear ALL the costs of the accident, thus they are incentivized to pay for protection against the accident. Since the injurer is not held liable and does not have to pay for the costs of the accident, they are not incentivized to pay for precaution.

Question 32

Under the rule of strict liability; - What incentive does the injurer have to pay for precaution costs? - What incentive does the victim have to pay for precaution?

Answer 32

The injurer has to pay for all accident damages, thus they are incentivized pay for precaution as they bear the total social cost. The injurer internalizes the externality caused by his actions. The victim does not have to pay for any accident damages, thus they are not incentivized to pay for any precautions as they do not bear the costs.

Question 33

Under the rule of strict liability, is the efficient precaution taken on by the injurer or the victim?

Answer 33

the injurer as the injurer has to pay for all damages, thus they are incentivized to pay for precuation - as through strict liability they internalize the externality caused by their actions. Because the victim is fully insured, they are not incentivized to take any precaution.

Question 34

what is bilateral precaution?

Answer 34

when both parties (the injurer and the victim) can take on the precaution to reduce accidents - which is the seemingly most efficient thing

Question 35

What is the dilemma that arises from bilateral precaution?

Answer 35

assuming there is perfect competition - under strict liability rules, the injurer is incentivized to pay for precaution and the victim is not - under no liability rules, the victim is incentivized to pay for precaution and the injurer is not Thus the issue is that neither rule achieves EFFICIENT PERCAUTION in which both parties simultanously pay for precaution - since the rules make it so only one is incentivized to do so

Question 36

what is the paradox of compensation

Answer 36

IF bilateral precaution was taken, meaning both the injurer AND the victim would both simultanously pay for precaution, it would mean that if an accident would occur, they would have to SHARE the costs of the damages caused by the accident. This would mean each party would only pay for 50%, which gives BOTH parties LESS incentive to pay for precaution So they would both take SOME care to pay for precaution (since the other party is paying the other half of the damages so they feel like they pay less), but not ENOUGH care (not an efficient level of care)

Question 37

What is one sollution to the paradox of compensation?

Answer 37

the negligence rule

Question 38

What is the negligence rule?

Answer 38

when the injurer is liable only if they breache their duty of reasonable care

Question 39

According to the simple negligence rule, what incentive do the injurer and victim have to pay for precaution?

Answer 39

According to simple negligence, the optimal level of precaution (on a graph) looks like xn (negligence lvl)= x* (standard lvl) SO; - IF the injurer chooses Xn = X* as the standard of care, they will NOT be held liable for damages. If the Injurer chooses to get LESS then the optimal standard of care provided by the law, they WILL be held liable for damages. Therefore, the injurer is incentivized to take the optimal standard of care. - If the injurer takes sufficient precaution, the victim will bear the 'residual risk' - the damage of accidents that may occur even despite the fact that the injuring party took a sufficient level of care - Therefore, it is also in the victims best interest to take a sufficient level of precaution in order to minimize their private costs SO if both the injurer and the victim take efficient precaution (aka bilateral precaution) - this leads to the most socially optimal outcome as BOTH parties contribute to minimizing potential risks and costs of accidents SO the negligence rule creates incentives for the efficient precaution by both injurers and victims

Question 40

What are the four variations of the negligence rule?

Answer 40

1) simple negligence 2) contributory negligence 3) comparative negligence 4) strict liability w/ contributory negligence

Question 41

what is simple negligence

Answer 41

when the injurer is liable if they are negligent (dont take sufficient standard of care / sufficient precaution level)

Question 42

Contributory negligence

Answer 42

if the injurer is negligent they are held liable, unless the contributor (victim) is ALSO negligent

Question 43

Comparative Negligence

Answer 43

liability is split on the proportion of fault

Question 44

Strict liability with contributory negligence

Answer 44

The injurer is held strictly liable UNLESS the victim is negligent

Question 45

what is the residual risk, does the injuring party or the victim party bear residual risk?

Answer 45

Under simple negligence, when a party upholds the efficient standard of care / takes appropriate levels of precuation to injury, they are not held liable for the costs of an accident. Thus, the VICTIM bears the residual risk of such costs.

Question 46

Define precaution vs activity levels How is this related to legal rules?

Answer 46

Precaution; how safely you perform an activity ex. driving speed Activity level; how much you engage in a risky activity ex. how many km you drive This is related to legal rules because; - rules affect how often we do risky activities (they dont only impact how FAST we drive but also how MUCH we drive) - Ideally, people should engage in risky activities only up to the point where the marginal benefit = marginal cost - IF the cost of an activity is GREATER than the benefit, one should refrain from engaging in that activity for example; - if the cost of getting in a car crash is bigger than the benefit you get from driving one extra km, you should NOT DRIVE THAT ONE EXTRA KM because it is inefficient

Question 47

Under no liability, whare the precaution levels and activity levels efficient for the injurer and the victim?

Answer 47

Injurers incentives: - This means the injurer is not held responsible for any accidents, thus they dont pay any damages, thus they do not consider the costs of the damages of accidents and are incentivized to have an inefficiently high activity level - driving example; person drive recklessly and too much bc they dont bear the costs Victims incentives: - since the victims bear all the costs, they are incentivized to take into account the costs and benefits of how frequently + how fast they drive - SO they are incentivized to take an efficient level of activity and efficient level of percaution

Question 48

Under strict liability, are the precaution levels and activity levels efficient for the injurer and the victim?

Answer 48

strict liability = injurer held liable injurer incentives; - since the injurer bears all the costs they are incentivized to take efficient activity levels and efficient precaution levels victim incentives; - since they do not bear any costs they are incentivized to have inefficiently high levels of activity and inefficiently low levels of precaution (drive too much and too fast)

Question 49

Under simple negligence , are the precaution levels and activity levels efficient for the injurer and the victim?

Answer 49

simple negligence; the injurer is held liable only if they did not follow the adequate standard set by law, victim bears residual damage in cases where the injurer did follow adequate standard of care Injurer incentive; - Since the injurer is not held liable if they take efficient care, they are incentivized to do so and take efficient precaution. - HOWEVER after they have done so they know they have avoided liabiity by paying the bare minimum, thus they ignore the costs of accidents and have inefficiently HIGH levels of activity - despite the efficient levels of precaution Victim Incentive; - the victim bears the residual risk which incentivizes them to take efifcient precaution, as well as have efficient levels of activity.

Question 50

How can we mathematically outine the efficient standard of care (under negligence) - AKA when are legal rules required by law efficient, and when are they inefficient?

Answer 50

Xn = X* => this means negligence rules are efficient, because the level of precaution required by law (Xn) and the level of precaution that minimizes total social costs (X*) are equal to each other IF they are not equal to each other = the legal standard of care is INEFFICIENT

Question 51

How do courts establish that Xn = X* (the legal standard of care is the same as the standard of care that minimizes the total social cost) ? | hint; it was through a case !

Answer 51

Via the Caroll Towing Case 1947, US - Judge Hand developed a test to decide when someone is and is not being negligent

Question 52

What did the Caroll Towing Case 1947 establish? | Hint: Judge Learned Hand was involved

Answer 52

In this case, Judge Hand developed a test to establish when someone is and is not being negligent. Judge Hand established that one is being negligent when B (burden (cost) of taking precautions) < P (probability of harm) < L (magnitute of less harm - aka Cost of accident ) AKA he established that if the cost of taking a safety precaution is LOWER than the cost of expected harm it would have prevented - and one did not take it -they are negligent = "if a precaution is efficient, you are negligent if you dont take it"

Question 53

Who established that if the cost of taking a safety precaution is LOWER than the cost of expected harm the precaution could have prevented - yet an individual did not take that precaution - they are negligent?

Answer 53

Judge Hand through the Hand test - essentially said, in the Caroll Towing Case, that there is an efficient precaution you can take and you dont take it, you are acting negligently and are held liable for damages under simple negligence. - B < P < L

Question 54

What does B < P x L mean?

Answer 54

b = burden of taking precautions / cost of precautions P = probability of harm / accident occuring L = maginute of loss (cost of accident) IF the burden of taking precautions is smaller then the probability of harm times loss of accident, then you should take precautions - and if you dont - you will be held liable and considred to have acted negligently.

Question 55

What are 5 assumptions we make regarding incentives for precautions and activity levels according to the basic economic model? | compare with reality

Answer 55

1. people are rationale beings (decisions based on rationality and self interest 2. no regulations that reduce external costs exist 3. everyone bears the cost of harm themselves (no insurance markets) 4. all injuries are solvent - nobody can escape responsibility just because they are broke, if you cause harm you always pay 5. litigation is free

Question 56

What are 5 assumptions we make regarding incentives for precautions and activity levels according to reality? | compare to the basic economic model

Answer 56

1. people are NOT always rationale 2. regulations that attempt to reduce external costs do exist 3. ppl have insurance 4. some ppl may be insolved = unable to pay damages 5. lawsuits are NOT FREE = litigation costs are high

Question 57

What are certain factors that limit our rationality? How does this impact tort law?

Answer 57

We have cognitive biases that limit our rationality, for example; - we make system errors in probability assesments - we underestimate low probability events (we undereact) - we overestimate vivid or publicized risks (we sometimes overeact) implications; - tort law should account for cognitive limitations - legal standards should be stricter to adress systemic biases - for example, strict liability when it comes to product sales helps overcome irational behaviour by eliminating the need to prove fault