Econ 522 Economics of Law Dan Quint Spring 2010 Lecture 15

Logistics HW2 due Wednesday (2:30 p.m. sharp) Second midterm next Wednesday (March 24)

In-class experiment from last Wednesday… The game: Players A and B each start with $10 Player A gives x to player B, which gets tripled Player B gives y back to player A, keeps 10 + 3x – y The treatments: Totally anonymous: done randomly, on paper, with SID (no names) In pairs, face to face, but with strategies written down In pairs, out loud, in front of whole class

The results In both “face-to-face” and “public” versions, trust was not a problem In both cases, every player A sent $10, so efficiency was achieved (maximum possible combined payoffs) In both cases, player B sent back $20 on average So player A trusted, and was rewarded In the anonymous version, trust was a problem, but not a huge problem Average A transferred $6.68, got back $8.35 So two-thirds of potential gains were realized Of those Player A’s who sent anything, 27% got back nothing, and 34% got back less than they gave

The raw data (anonymous version)

Summary of results Average A Transfer Average B Transfer Average A Payoff Average B Payoff Average Combined Anonymous 6.7 8.4 11.7 21.7 33.4 Face to Face 10.0 20.0 20.0 20.0 40.0 Out Loud 10.0 20.0 20.0 20.0 40.0

More information on the anonymous treatment Player A gave Observa-tions % that got nothing back % that got less than they gave Average Payoff “Average return” 0 – 2 7 100% 0% 9.7 0% 3 – 7 15 33% 33% 11.3 127% 8 – 10 25 20% 32% 12.4 125%

On the topic of illegal contracts…

Let’s recap our story so far…

Our story so far Efficiency Maximizing total surplus realized by everyone in society Scarce resources are owned by whoever values them most Actions are taken if social benefit exceeds social cost Design a legal system that leads to efficient outcomes Once we set up the rules, we don’t expect people to act based on what’s efficient We expect people to do whatever’s in their own best interest So the goal is set up the rules such that people acting in their own best interest will naturally lead to efficiency We started this class by defining the notion of efficiency Basically: the idea of maximizing the total surplus realized by everyone in society Efficiency requires that scarce resources be owned by whoever values them the most And that any action should be taken if its total social benefit exceeds its total social cost We made the claim that we’re interested in designing a legal system that leads to efficient outcomes What makes this hard? Once we set up the rules, we don’t expect individuals to act based on what’s efficient We expect individuals to do whatever is in their own best interest So the goal is to set up the rules in such a way that people acting in their own best interest will naturally lead to efficiency

Our story so far Coase gives us one way to do that As long as property rights are clearly defined and tradeable, and there are no transaction costs, people have incentive to trade until each resource is efficiently owned So initial allocation of rights doesn’t matter for efficiency But if there are transaction costs, we may not get efficiency this way Led us to two normative views of the legal system: 1. Minimize transaction costs (“lubricate” private exchange) 2. Allocate rights as efficiently as possible Tradeoff between injunctive relief and damages Coase gives us one way to do this Efficiency requires things to be owned by whoever values them the most Suppose we set up a legal system where things can be bought and sold If I value something more than you, it’s in my best interest to try to buy it from you And if you value something less than me, it’s in your best interest to try to sell it to me So if we both pursue our own selfish best interests, I’ll end up with the object, which is efficient As long as property rights are clearly defined and tradeable, and there are no transaction costs, people have an incentive to trade until each resource is owned by whoever values it most (Works for objects; also works for rights, e.g., right to good night’s sleep versus right to have a party next door) And since this argument doesn’t depend on who starts with what, Coase tells us that the initial allocation of rights doesn’t matter for efficiency, only for distribution On the other hand, when there are transaction costs – impediments to private bargaining – we may not get to efficiency this way This led us to two different normative views of the legal system: One, that the legal system should aim to minimize transaction costs (“lubricate” private exchange, the normative Coase), since if we make transaction costs low enough, efficiency will follow Or two, that the legal system should aim to allocate rights efficiently (the normative Hobbes), so that less is lost when private exchange fails The two normative views can roughly be seen as the arguments in favor of the two usual remedies to protect an entitlement: injunctive relief and damages. Injunctions are simpler for a court to implement, and create clear property rights that the parties can negotiate around when they are allocated inefficiently Damages are more expensive to implement, but lead to more efficient outcomes when transaction costs are too high to rely on voluntary trade We then tackled several other questions a property rights system had to answer – what can be owned, what owners can do with their property, who ownership is established, and remedies – and called that property law

Our story so far Property law works well for simultaneous trade Contracts allow for non-simultaneous trade Contract law can… Enable cooperation Encourage efficient disclosure of information Secure optimal commitment to performance Secure efficient reliance Supply efficient default rules and regulations Foster enduring relationships Part of what makes property law straightforward is that trade tends to be simultaneous I give you an apple, you give me $1 However, in some situations, efficient trade can’t be done simultaneously It might be efficient for me to build you a house But it would be very complicated/costly for you to pay me each day for that day’s work Contract law gives us a way to transact when the transaction does not occur all at once – when one of us has to depend on a promise by the other We saw a number of different purposes contract law can achieve: It can enable cooperation when it would otherwise be impossible, as in the agency game we analyzed It can encourage disclosure of information, as we saw in Hadley v Baxendale It can lead to efficient breach and efficient investment in performance, as we saw in the airplane example It can lead to efficient levels of reliance, although setting incentives for both efficient breach and efficient reliance is difficult It can supply efficient default rules and regulations – usually by imputing contract terms most parties would have wanted, but sometimes in other ways It can foster enduring relationships, which depend less on the court system

Our story so far Property law works well when transaction costs are low enough to get voluntary trade Contract law works well when transaction costs are low enough that we can agree to a contract, but high enough that we may not want to renegotiate the contract later What about when transaction costs are too high to agree to anything in advance? This is tort law

Tort law

Tort law Tort, noun. from French word meaning injury Contract law: situations where someone harms you by breaking a promise they had made Tort law: situations where someone harms you without having made any promises “If someone shoots you, you call a cop. If he runs his car into yours, you call a lawyer.” Today, we begin tort law The word tort is from French, and means injury With contract law, we studied situations where someone injured you by breaking a promise they had made With tort law, we will look at situations where someone harmed you without having made any promises. A line I like from the Friedman book: “If someone shoots you, you call a cop. If he runs his car into yours, you call a lawyer.” In fact, the line between tort law and criminal law isn’t always clear Some torts are crimes as well – if someone assaults you, they may go to jail, and you may also sue them for damages (Plus, there’s the OJ Simpson case.) We’ll get to criminal law in a few weeks; for now we’ll focus on torts – civil actions for harms done to another person.

Tort law Question: how to structure the law to get people to behave in a way that leads to efficient outcomes? Deliberate harms: make punishment severe (criminal law) Accidental harms: trickier Goal isn’t “no accidents”; goal is “efficient number of accidents” As with nuisance law and contract law, our focus in torts will not be on fairness or equity, but on efficiency And so the question will be, how to to structure the law to provide incentives for people to behave in a way that leads to efficiency For deliberate harms, this will usually be fairly simple If we don’t want people to get in bar fights and break each others’ noses, we can just make the penalty for being in a bar fight very severe This is roughly the intent of criminal law We take a behavior we don’t want people to do, and assign a severe punishment for doing it For accidental harms, though, setting the correct incentive to avoid harm is tricky We could prevent all traffic accidents by outlawing cars We could prevent all construction injuries by outlawing construction We could prevent almost all traffic accidents by punishing fender-benders with death, and accept that this would lead to most people not driving, and those who did drive, driving 5 mph But this would clearly be inefficient What we want, instead, is the “efficient number of accidents” That is, the number of accidents such that preventing another one would be inefficient (due to the resources it would require)

Tort law Question: how to structure the law to get people to behave in a way that leads to efficient outcomes? Deliberate harms: make punishment severe (criminal law) Accidental harms: trickier Goal isn’t “no accidents”; goal is “efficient number of accidents” Unlike nuisance law, injunctive relief is not an option Unlike contract law, no agreement ahead of time Cooter and Ulen: essence of tort law is “the attempt to make injurers internalize the externalities they cause, in situations where transaction costs are too high to do this through property or contract rights” Tort law differs from the other areas of law we’ve look at so far Unlike in nuisance law, when it comes to torts, injunctive relief is usually not an option Much as we’d like to imagine that nobody could run into your car without negotiating for permission, it doesn’t work that way Unlike with contract law, there is no promise or agreement made ahead of time; something happens, and then we deal with it Tort cases may involve parties who are complete strangers We can think of tort law as covering the situations where transaction costs were too high to allow for bargaining it’s impossible to negotiate with every driver for the right to hit you it’s not always possible to bargain with an angry drunk about whether or not he breaks your nose. Thus, Cooter and Ulen define the economic essence of tort law this way: the attempt to make injurers internalize the externalities they cause, in situations where transaction costs are too high to do this through property or contract rights

Cast of characters Plaintiff – person who brings a lawsuit Defendant – person who is being sued In a nuisance case, the defendant caused a nuisance, plaintiff was bothered by it, might be asking for injunction or damages In a contract case, defendant breached a contract or violated its terms In a tort case, defendant caused some harm to plaintiff, plaintiff is asking for damages Plaintiff is the victim (person who was harmed) Defendant is the injurer (person who caused the harm) We haven’t really said much about the legal process itself – who sues who and what happens then We’ll come back to this a bit more at the end of the semester But for now, we do need terms for who’s who

“Classic” legal theory of torts Harm Causation Breach of Duty With contract law, we started out by discussing a “classic” legal theory of contracts (the bargain theory), and then moved on to an economic analysis With torts, we’ll do the same The traditional theory of tort liability was developed about 100 years ago It specified three key elements of a tort, which must be present for a plaintiff to recover damages: harm causation breach of duty

Element 1: Harm For a tort to exist, the plaintiff needs to have been harmed “Without harm, there is no tort” Gas company sold gas with a defective additive Dangerous for cars with turbocharged carburetors You have a car with normal carburetors You might be angry; but you weren’t harmed, so you can’t sue Similarly, no compensation for exposure to risk Manufacturer exposed workers to some chemical Exposure will cause 15% of them to develop cancer later in life Can’t sue now – have to wait, see who gets cancer, then they can sue First, and simplest, the plaintiff needs to have been harmed. Without harm, there is no tort An example from the textbook: A gas company sold gas with a defective additive It had no effect on cars with normal carburetors, but was dangerous in cars with turbocharged carbs You have a car with a normal carburetor might be outraged by the situation You might be outraged that you were sold a defective product; but since the gas did no damage to your car, you cannot sue Similarly, traditional tort theory does not compensate for exposure to risk. Suppose a manufacturer accidentally exposed a bunch of workers to some chemical Doctors agree the exposure will cause 15% of them to develop liver cancer later in life Under traditional tort doctrine, the victims must wait and see who gets cancer before suing Similarly, if I do something negligent that causes you a 50% chance of dying, but you get lucky and escape the situation, I’m generally not liable for any damages. (So far, U.S. courts have been reluctant to allow tort actions on the basis of exposure to harm, although some believe they should Thus, safety regulation, administered by a government agency, is typically used instead of tort law to deal with exposure to low-probability harms.)

Element 1: Harm Perfect compensation Money In theory, harm has a simple economic interpretation: a downward shift in the victim’s utility Like in the hairy hand case, we can imagine a victim has some utility function over health and money, with some sort of indifference curves A car accident might lower my wealth because my car is worth less And also lower my health because I got whiplash So now I’m on a lower indifference curve Perfect compensation should theoretically restore me to my original level of utility. Money damages are typically how this is done. Obviously, some amount of money can get me back to my original level of wealth By repairing whatever broke on my car, or allowing me to buy a new car If there is medical care available that would restore me to my original level of health, then the cost of this treatment would get me back to my original level of health as well, so I’d be back where I started. Of course, there are some harms that can’t be undone a lost leg, or some other permanent injury But there may be some amount of money that would compensate for it, by getting me back to the same indifference curve I started out on Just like in the hairy hand case, we can work out perfect damages in this way. Health Perfect compensation restores victim to original level of well-being generally done through money damages

Perfect Compensation Tangible harms Intangible harms Medical costs Lost income Damaged property Emotional harm Pain and suffering Loss of companionship In theory, perfect compensation should cover all losses Historically, courts have been less willing to compensate for intangible or hard-to-measure losses Over time, U.S. courts have started compensating for more intangible harms Pro: the closer liability is to actual harm done, the better the incentive to avoid these harms Con: disparity in award sizes, unpredictability So that’s the theory – the notion of “perfect compensation” In an accident, there may be certain clear, tangible losses: medical costs, lost income, property damage that resulted from an accident These are usually straightforward to measure And there may also be intangible losses, which are harder to measure: things like emotional harm, pain and suffering, loss of companionship due to someone’s death In theory, perfect compensation is supposed to compensate you for all losses But historically, courts have only been willing to compensate victims for tangible harms; courts have been less willing to compensate for intangible losses or losses that are difficult to measure Over the years, however, American courts in particular have expanded the list of compensable harms to include many of these intangibles One area where there is a huge disparity between tangible harm and actual harm is in the death of a child If a drunk driver kills a child, there is no loss of income to the child’s family; if anything, they avoid the expense of raising the child. This used to be a difficult problem for courts, as they could not find a tangible, measurable harm on which to base compensation. Allowing compensation for emotional distress and loss of companionship solves this problem There are pros and cons to trying to compensate for intangible harms As we’ll see soon, the closer we come to setting liability equal to the actual harm done, the better we’ll set incentives for efficient harm avoidance That is, we will want injurers to internalize the harm they do, so we want liability as close as possible to the actual harm On the other hand, intangible harms are extremely difficult to calculate. Reasonable people might disagree dramatically about the emotional harm of losing a leg, much less a child (In addition, some people are horrified at the very idea of putting a dollar value on someone’s life And clearly, there is no amount of money that would make most parents indifferent to losing a child) So while compensation for intangible harms is an appealing idea, it leads to a great deal of disparity in awards, across different courts, or even within the same court, for similar injuries.

“Classic” legal theory of torts Harm Causation Breach of Duty We said the classic theory of torts has three elements: harm, causation, breach of duty That covers the first element of a tort under the traditional view – harm Next up: causation

Element 2: Causation For a tort to exist, the defendant needs to have caused the harm to the plaintiff Cause-in-fact “But for the defendant’s actions, would the harm have occurred?” The second element that must be present is causation – that is, the defendant needs to have caused the harm to the plaintiff Here, things can get pretty tricky Suppose the factory where I work exposes me to some chemical that increases my risk of some disease from 1% to 2% Later, I come down with the disease Did the chemical cause it? The law distinguishes between two types of causes The first is “cause-in-fact” The test for cause-in-fact is generally the “but-for test” That is, “but for the defendant’s actions, would the harm have occurred?” There’s an example in the Friedman book that shows how tricky even this simple rule can be Three friends go out hunting, one of them scares up a pheasant, the other two turn and shoot and both, mistakenly, at the same exact time, shoot the first one, one through the head, one through the heart. Each one is very apologetic to the man’s widow, but says, “If I hadn’t shot him, he’d still be dead.” Did either of them cause his death? But for either one’s actions, he’d still have died. Another problem: the “but-for” test is that it doesn’t distinguish between recent actions and more distant actions. I punch a guy in the face in a bar Clearly, but for my punching him, his nose wouldn’t have been broken. Also, but for him getting a job in Madison and moving here three years ago, he wouldn’t have been in my bar to get punched in the face, and the harm wouldn’t have occurred So is his employer liable? Also, but for his parents having conceived him, he wouldn’t have been alive to be punched in the face, and the harm wouldn’t have occurred So are his parents liable? (A friend’s Facebook status the other day was about a colleague’s wife who had hit a deer, wondering “who would pay for her pain and suffering, since the county should really keep deer fenced in”)

Element 2: Causation For a tort to exist, the defendant needs to have caused the harm to the plaintiff Cause-in-fact “But for the defendant’s actions, would the harm have occurred?” Proximate cause Immediate cause – defendant’s action can’t be too distant from the harm Palsgraf v Long Island Railway (NY Ct Appeals, 1928): Guard pushed a passenger to help him onto train, passenger dropped fireworks he was carrying, they went off, explosion knocked down scales at the other end of the platform, which fell on Mrs. Palsgraf Guard’s actions were not the proximate cause For this reason, for a tort to exist, the defendant’s act must not only be the cause-in-fact of the harm, it must also be the proximate cause Proximate just means close – that is, the immediate cause There’s no clear definition for how close the cause must be. There’s a famous case, Palsgraf v Long Island Railway (NY Ct Appeals, 1928), that addressed this problem: Plaintiff [Mrs. Palsgraf] was standing on a platform of defendant’s railroad after buying a ticket to go to Rockaway Beach. A train stopped at the station, bound for another place. Two men ran forward to catch it. One of the men reached the platform of the car without mishap, thought he train was already moving. The other man, carrying a package, jumped aboard the car, but seemed unsteady as if about to fall. A guard on the car, who had held the door open, reached forward to help him in, and another guard on the platform pushed him from behind. In this act, the package was dislodged, and fell upon the rails. It was a package of small size, about fifteen inches long, and was covered by a newspaper. In fact it contained fireworks, but there was nothing in its appearance to give notice of its contents. The fireworks when they fell exploded. The shock of the explosion threw down some scales at the other end of the platform many feet away. The scales struck the plaintiff, causing injuries for which she sues. The Long Island Railroad guard’s actions in pushing the passenger did indeed cause Mrs. Palsgraf’s injuries he pushed a passenger who dropped a package of fireworks which went off and caused the scales to fall on her But the court ruled his actions were too remote to be considered the proximate cause As I said, though, there’s no precise legal definition for how close the action must be to the harm

Element 2: Causation “A tree fell on a moving trolly, injuring passengers. One of them sued. He succeeded in demonstrating that in order for the trolly to be where it was when the tree fell on it the driver had to have driven faster than the speed limit at some point during the trip. Breaking the law is per se negligence, so the driver was legally negligent whether or not his driving was actually unsafe. If he had not driven over the speed limit, the trolly would not have been under the tree when it fell, so, the plaintiff argued, the driver’s negligence caused the injury.” Court ruled driver’s negligence “had not caused the accident in the legally relevant sense” Another example from the Friedman book: I run into a friend on the street, and we stop to talk for a minute. We say goodbye, go our separate ways, and twenty seconds later, he’s crushed by a falling safe. Clearly, but for talking to me, he would still be alive – he would have passed that spot well before the safe fell. Did I cause his death? Am I liable? Friedman claims this hypothetical is based on a real case: “A tree fell on a moving trolly, injuring passengers. One of them sued. He succeeded in demonstrating that in order for the trolly to be where it was when the tree fell on it the driver had to have driven faster than the speed limit at some point during the trip. Breaking the law is per se negligence, so the driver was legally negligent whether or not his driving was actually unsafe. If he had not driven over the speed limit, the trolly would not have been under the tree when it fell, so, the plaintiff argued, the driver’s negligence caused the injury.” Thankfully, the court was not stupid, and the plaintiff lost The court held that the driver’s negligence “had not caused the accident in the legally relevant sense.” I’m not really sure what that means, but it seems pretty clear that innocent actions which led to an accident by chance, but did not increase its likelihood, should not be punished In this case, the driver’s speeding was just as likely to prevent the accident (by passing that point before the tree fell) as to cause it If we think about tort law as an attempt to set the right incentives, there is no reason to discourage the driver’s actions

“Classic” legal theory of torts Harm Causation Breach of Duty That covers harm and causation The third element of a tort: breach of duty Breach of duty is sometimes, but not always, necessary for a tort to exist

Element 3: Breach of Duty (Sometimes required, sometimes not) Element 3: Breach of Duty Strict Liability Negligence Harm Causation Harm Causation Breach of duty (fault) When someone breaches a duty he owes to the defendant, and this leads to the harm, the injurer is at fault, or negligent Injurers owe victims the duty of due care Negligence rule: I’m only liable if I failed to take the required standard of care – not if I was careful and the accident happened anyway The third element is breach of duty, and is sometimes necessary and sometimes not. There are two different rules we will consider for tort liability: strict liability and negligence Under a strict liability rule, all that is necessary for liability is harm and causation Under strict liability, if I hit you with my car, I owe you damages – whether or not I was driving fast or slow, drunk or sober, when I hit you Under the common law, strict liability tends to be the rule for activities that are inherently dangerous The book gives the example of a construction company blasting with dynamite – the company is liable for any harm caused by the blasting. Wikipedia offers the example of a tiger rehabilitation center – if a tiger escapes and causes injuries, the owner is responsible, no matter how careful he was In most situations, however, there is a third element that must be demonstrated in addition to harm and causation. It must be shown that the defendant breached a duty he owed to the defendant, and that this breach led to the harm If I punch someone in a bar, I breach a duty not to punch them When an injurer breaches a legal duty, he is “at fault,” or “negligent.” A liability rule requiring all three elements – harm, causation, and fault – is referred to as a “negligence” rule. Under a negligence rule, a defendant can argue that an accident occurred despite his best efforts to prevent it. That is, under a negligence rule, even if I caused you harm, I’m not liable if I satisfied the appropriate standard of care and the accident happened anyway For accidents, the “duty” owed to the victim is the duty of care When that duty is breached, that is, when I am careless or negligent, then if I cause an accident, I am liable When I meet that duty, even if you get hurt, I’m not liable

Hence the language in the trolly example “A tree fell on a moving trolly, injuring passengers. One of them sued. He succeeded in demonstrating that in order for the trolly to be where it was when the tree fell on it the driver had to have driven faster than the speed limit at some point during the trip. Breaking the law is per se negligence, so the driver was legally negligent whether or not his driving was actually unsafe. If he had not driven over the speed limit, the trolly would not have been under the tree when it fell, so, the plaintiff argued, the driver’s negligence caused the injury.”

So under a negligence rule… If I breach my duty of due care and injure you, I am liable If I exercise the appropriate level of care but still injure you, I’m not liable How is the standard of care determined? That is, how careful do I have to be to avoid liability, and who decides? Is it negligent to drive 40 MPH on a particular road at a particular time of day? What about 41 MPH? 42? Of course, this leaves the question of what is the appropriate standard of care, and who determines it – that is, how careful do I have to be to not be considered negligent? In some cases, there may be a clear yes/no test – a swimming pool had a lifeguard on duty or it didn’t. In many cases, there isn’t. Is driving a car 40 MPH on a particular road negligent? What about 41? 42?

How is the standard of care determined? Some settings: government imposes safety regulations that set standard for negligence Speed limits for highway driving Requirement that bicycles have brakes Workplace regulations Some standards are left vague “Reckless driving” may depend on road, time of day, weather… Common law focuses on duty of reasonable care Level of care a reasonable person would have taken (Civil law relies less on “reasonableness” tests, tries to spell out what level of care is required) How is this standard of care determined in practice? In some cases, the government imposes safety regulations that set the standard speed limits for highway driving the requirement that bicycles have brakes and cars have working horns workplace regulations and so on Some standards are left vague the definition of “reckless driving” may depend on the road, the time of day, the weather in these situations, the common law tends to focus on the duty of reasonable care like foreseeable reliance, this is the level of care that a reasonable person would have taken under the circumstances If you took less care than a reasonable person would have, you are liable If you took more care, you are not. (The civil law tends to rely less on standards of “reasonableness”, and tries to be more specific in what duties are owed and what level of care is required.)

Strict liability versus negligence Strict liability rule: plaintiff must prove harm and causation Negligence rule: must prove harm, causation, and negligence A little history Early Europe: strict liability was usual rule By early 1900s, negligence became usual rule Second half of 1900s, strict liability became more common again, especially for manufacturer liability in American consumer products U.S. manufacturers now held liable for harms caused by defective products, whether or not they were at fault Under a rule of strict liability, proof of negligence is unnecessary; proving harm and causation is enough to establish liability Under a rule of negligence, you must prove harm, causation, and negligence Interestingly, the movement between these two rules has not always gone in the same direction. Strict liability was the usual rule in much of Europe before the 1800s. By the beginning of the 1900s, negligence became the usual rule but in the second half of the 1900s, strict liability experienced a rebirth, especially for manufacturer liability in American consumer products. Manufacturers in the U.S. are now held liable for harms caused by defective products, whether or not they were at fault – we’ll see examples of this shortly The Friedman book spends a surprising amount of time on the problem of who should be responsible when a bottle of Coke explodes, which I guess used to be a pretty big problem before they switched away from glass bottles

“Classic” legal theory of torts Harm Causation Breach of Duty So that covers harm, causation, and breach of duty – the three elements of a tort under the classic theory Next week, we’ll begin our economic analysis of tort law In the meantime, there’s one thing I want to emphasize, and that is the idea of thinking about the law as a set of incentives, and what that means

Precaution

Lots of things both victims and injurers can do to reduce number (or harm) of accidents Injurer’s Precaution Victim’s Precaution faulty electrical wiring causes house fire manufacture wiring more carefully fireproof house moving car hits parked car drive more safely park car in safer space car hits pedestrian drive more safely walk more safely Car hits a bicyclist – driver could be driving slow or fast, changing song on iPod or paying attention, could be drunk or sober, headlights working or not… Bicyclist could be on bike path or in road, wearing reflective clothing or black, could be watching for cars or listening to music and oblivious Textbook gives a bunch of other examples of things that either party could do to reduce the likelihood of different types of accidents These are actually pretty boring, and that’s sort of the point – they’re not exotic, they’re just lots of obvious things that each party in an accident had some control over software fails better design of software back up data at risk exploding coke bottle improve quality control by bottler handle bottles carefully medicine causes side effects improve warning on medicine study warning on medicine Cooter and Ulen, p. 338

We will call all these things precaution Precaution: anything either injurer or victim could do to reduce likelihood of an accident (or damage done) The next two questions should be obvious… How much precaution do we want? What is efficient level of precaution? How do we design the law to get it? Clearly, some precautions are inefficient Suppose there’s a radar system you could install in a car, which would beep if there’s a person in the road in front of you And suppose we figured out that, if every car in the country had one of these, there would be, on average, 1 less accident a year And the radar systems cost $10,000 each Chances are, we would not want this So the question is, for which precautions is the social benefit – the reduction in accidents – greater than the social cost – the actual cost of the precaution And of course, is there a way to design the law so that the efficient level of precaution is naturally the level that gets taken Wednesday, we’ll start to answer both those questions