Part D-I The Economics of Tort Law 11/10/09 Tort_A2

Objectives The legal theory of Tort Law Precaution and Harm The essentials of the economics of torts 11/10/09 Tort_A2

The Legal Theory of Tort Law The three elements of the traditional theory of torts 1. The plaintiff must have suffered harm 2. The defendant’s act or failure to act must have caused the harm 3. The defendant’s act or failure to act must constitute a ‘breach of a duty’ owed to the plaintiff by the defendant. 11/10/09 Tort_A2

1. If no harm was actually suffered then there was no tort. Examples: - The school bus company hires a driver with three previous drunk driving charges and this driver is charged with drunk driving while driving your child home from school. No accident, no harm, no tort - you cannot sue. - You find out that the classroom that you are sitting in has been mistakenly painted with the radioactive paint. You are told that the probability that you will develop cancer over the next 25 years has tripled as a result. You cannot sue for exposure (having suffered increased risk). You must first develop cancer and then try to sue for the harm. 11/10/09 Tort_A2

I punch someone and break his nose. I caused the broken nose. 2. Traditional theory requires that the defendant must have ‘caused’ the plaintiff’s harm. I punch someone and break his nose. I caused the broken nose. I attempt to punch someone, he steps back and falls into an open manhole breaking his nose. I did not cause the broken nose. 11/10/09 Tort_A2

Causation and torts versus morality. An act can be ‘wrong’ (reckless, endangering, immoral, criminal, etc.) but not a tort. Ex: On New Years Eve my friends and I go out-of-doors and fire off our hand guns. My shot happens to hit and kill my neighbour. My friends and I all did something equally stupid but only I committed a tort. 11/10/09 Tort_A2

Cause-In-Fact and the But-For-Test Determining causation can be very difficult. It is a difficult philosophical proposition. Cause-In-Fact and the But-For-Test But for A would event B have occurred? If the answer to the above question is ‘no’ then A was the cause-in-fact. If the answer to the above question is ‘yes’ then A was not the cause-in-fact 11/10/09 Tort_A2

The but-for-test is not always useful - Multiple causes Ex: I buy a camping stove that is defective. It blows-up destroying my campsite. Had the stove not been defective would my campsite have blown-up? No, therefore the defective stove is the cause-in-fact. The but-for-test is not always useful - Multiple causes My car brakes are defective (they are only 75% effective). One day I am ‘speeding’ down the road a pedestrian walks out in front of my car and I slam on the brakes and hit her. What does the but-for-test say? Both the defective brakes and my speeding caused the accident. 11/10/09 Tort_A2

Distant and proximate cause I realize that my brakes are defective so I pull over and park on the side of the road but my car is partially on the pavement. Another car hits my car. But-for-the defective brakes the accident would not have occurred is the brake manufacture at fault? Generally the ‘proximate’ cause establishes liability under the traditional theory (I parked my car incorrectly.) - I had the ‘last clear chance’ to avoid the accident 11/10/09 Tort_A2

The concept of cause in tort and functions in economic models Consider economic models of utility or profit max. Each individual has some utility function in which there are variables the values of which make them happier, less happy, more profit, less profit, etc. Level of well-being, for me is = U [good health, wealth, consumption (food, clothing, cars, movies, cigarettes ...), peace of mind, safe neighbourhood, ...]. Level of well-being, for you is = V [good health, wealth, consumption (food, clothing, ‘fast’ cars, movies ...), peace of mind, clean air, driving fast, ...]. 11/10/09 Tort_A2

Level of profit, for the firm is = Q (labour, steel, asbestos, ...). You control a variable that affects my level of utility, driving fast. Our utility functions are said to be ‘interdependent’ I control a variable that affects your utility, smoking. So again, our utility functions are ‘interdependent’. The firm has some profit function in which there are variables - again think of this in very broad terms Level of profit, for the firm is = Q (labour, steel, asbestos, ...). The firm controls a variable that affects my level of utility, asbestos. Our utility and output, or profit functions are said to be ‘interdependent’ 11/10/09 Tort_A2

Cause in tort is usually created by such interdependencies When one agent controls a variable that affects another agent’s utility or profit this interdependence gives rise to an externality. Cause in tort is usually created by such interdependencies - externalities. 11/10/09 Tort_A2

3. Breach of Duty - Describing ‘fault’ Fault arises if the defendant’s actions, or failure to act, does not meet some ‘legal standard of care’ A ‘duty of care’ is a legal standard which establishes the minimum acceptable level of precaution in the given situation. The defendant must be shown to have breached a duty that was owed to the plaintiff. If the defendant has breached a duty of care, then he or she is said to be at fault or negligent. 11/10/09 Tort_A2

Our study of torts is a study of accidents Fault might result from an intentional tort or negligence (failure to take precautions) In this course we will deal with unintentional torts - accidents Intentional torts are generally crimes and are dealt with in criminal law Our study of torts is a study of accidents 11/10/09 Tort_A2

Negligence and liability The notion of negligence allows for a defence that the defendant followed all the applicable standards of care. Therefore, despite the accident having occurred, and despite someone having been injured, no tort was committed. Example: You fell into a hole on my construction site. But I had posted a warning and erected barriers which you ignored. I fulfilled my duty to care – no liability, no tort. 11/10/09 Tort_A2

There are different notions of liability in tort law If the rule is strict liability then establishing harm and proximate cause is sufficient to establish liability for a tort. When does strict liability apply? Generally when the activity is inherently risky, creating unusual danger (using dynamite). Even if the defendant takes all the normal precautions, if an accident occurs and someone is harmed, then they are at fault. The risk of loss is entirely shifted to the party who decides to engage is such very risky activities. This appears to apply to the manufacturer of almost anything in the USA. 11/10/09 Tort_A2

How is the legal standard of care established? By law (speed limits, fire regulations, health and safety regulations) more or less precise statements of the legal standard. By unwritten social norms, community standards By professional standards of practice By Judges – in common law – ‘reasonable care’, ‘reasonable person’. 11/10/09 Tort_A2

Legal Standard of Care for Continuous Precaution Forbidden zone Permitted zone x< x’ x > x’ Pr. of an accident Pr. of an accident 100% 0% x’ x ----------- x = amount of precaution <---------- Pr. of accident x’ = standard of care 11/10/09 Tort_A2

Examples of Precaution Height of fence around a swimming pool Maintenance schedule on aircraft Driving speed Brake inspection Fire alarms and sprinklers Doctor taking a rest between operations Doctor ordering diagnostic tests Second opinions etc. Each of the above affects the probability of an accident Discrete vs Continuous precaution 11/10/09 Tort_A2

How to measure Harm Recall that a Tort implies that someone was harmed The injured person has the right to seek compensation –damages - to be made whole The harm might include: - damaged property - lost earnings - physical harm - medical and rehabilitation costs - lost opportunity to marry - loss of guidance and companionship - psychological trauma - etc. 11/10/09 Tort_A2

The utility model, a definition of harm and Perfect Compensation How can a court deal with damages in the context of emotional grief or physical harm? The utility model, a definition of harm and Perfect Compensation What about the economic notion of utility - individual well-being? 11/10/09 Tort_A2

Compensation (damages) W2 – W1 Wealth Loss of health H1 - H2 Compensation (damages) W2 – W1 C W2 A U1 B W1 U0 Health H2 H1 11/10/09 Tort_A2

Referred to by economists as Hedonic Damages. Under this ‘utility model’ there will always be some amount of monetary damages that could make the plaintiff whole - perfect compensation Referred to by economists as Hedonic Damages. - Bias towards full compensation for tangible losses (out-of-pocket expenses, lost income, etc.). These types of losses are easier to quantify. - Bias against attempting to fully compensate for intangible losses (emotional harm, distress, loss of care and guidance, pain, suffering, etc.) Difficult to quantify: ‘subjective’ harm versus ‘objective’ unit of money? Very difficult for courts to regulate this. 11/10/09 Tort_A2

We want perfect compensation because we want people to take an efficient level of precaution We want potential injurers to consider the full cost of any harm they might cause We will see that inflicting harm without consequence leads to too much harm inflicted - too much risk leading to too many accidents Example: Currently in Canadian courts, if a child is injured, then the injuring party is liable for the full cost of medical care, rehab, out-of-pocket expenses, future loss of income, but a maximum amount of pain and suffering ($320,000). If the child is killed in the accident, then the surviving family might receive $10,000 to $50,000, depending on the family circumstances. Pain and suffering compensation is likely too low in Canada – maybe too high in the United States???? 11/10/09 Tort_A2

The Essential Economics of Tort Law Tort law concerns relationships among individuals for which transaction costs are relatively high. We impose risk on each other every day Have you ever thought to yourself? - I wish my neighbour would keep his pit bull tied up. - I wish that person wouldn’t drive so fast. - I wish the neighbour would shovel his sidewalk. - I hope this doctor knows what she is doing. - I hope this airline has performed proper maintenance. 11/10/09 Tort_A2

Just about everything we do imposes some risk on someone. These risks are externalities since they result from our actions but we do not account for them when we decide to do the things we do (we do not pay for the risks we impose on others). Why don’t we negotiate for payment in these cases. Risk bearer’s property rights – make the risk creators pay the risk bearers for the risk they impose, Or Risk creator’s property rights - negotiate with the risk creator on a price the risk bearer will pay for a reduction in risk. Transaction costs would be far too high and these are generally low probability events (the potential gain from any one trade would be small). - it makes no sense to assign property rights to risk – no subsequent trading can take place. 11/10/09 Tort_A2

Problem: we cannot negotiate a price for the risks because of the combination of low probability events and high transaction costs. Examples: - motorists cannot negotiate in advance who will pay for a traffic accident (too many motorists and too many possibilities). - manufactures will not want to negotiate over the costs of all the things that might go wrong with their products. - you would not want to negotiate the allocation of risk of a slip and fall with every visitor to your home or business. Nonetheless, in all of the above examples we would want the motorist, manufacturer and you to take appropriate precaution (to consider the risk you impose on others). 11/10/09 Tort_A2

Tort law attempts to assign responsibility (termed liability) for these risks to those who create them and thereby induce individuals to internalize the externalities (the risks they impose on others) The economic purpose of tort liability is to make individuals internalize the risk (potential harm caused by torts) and thereby induce individuals to invest in safety (to take precaution) Much of the economic analysis of tort law deals with the design of efficient liability rules and determination of damages - who will pay and how much if an accident happens 11/10/09 Tort_A2

Do we want a world of zero risks? No, we want an efficient amount of risk. - efficient in that the liability and damages should result in a minimization of the sum of the cost of avoiding the ‘bad outcome’ and the cost that results if the ‘bad outcome’ occurs. The task of tort law is a difficult one A balancing act Efficient liability rules and damages must balance the possible cost of harm (if an accident happens) against the cost of avoiding the accident (precaution) 11/10/09 Tort_A2

- criminal law (drunk driving laws), Note that there are other ways to internalize the externalities created by high transaction costs in these ‘tort’ situations. - criminal law (drunk driving laws), - regulations (auto safety - manufacturer and driver), - tax/expenditure incentives (free child car seats). Such policies are used along with tort law to control the risk we impose and face each day 11/10/09 Tort_A2

To Summarize We impose risk on each other in our daily lives Society has developed norms of behaviour aimed at limiting these risks Individuals sometimes cause harm to others by violating these standards of care. The courts determine whether or not a violation of these standards caused the harm and assign liability to the individual who is at fault (negligent) or who simply caused the harm (strict liability). If tort law is efficient it should cause each of us to internalize the risk we impose on others. 11/10/09 Tort_A2