Part D-I The Economics of Tort Law 11/10/09 Tort_A1

Objectives A review of Private Law What is a Tort and what is Tort Law? Tort law as Private Law (what’s so different?) 11/10/09 Tort_A1

Economics of Private Law Three traditional areas of Private Law Property Law Contract Law Tort Law Property Contracts Torts 11/10/09 Tort_A1

Four basic issues in property law: 1. How are ownership rights established? 2. What can be privately owned? 3. What may owners do with their property? 4. What are the remedies for the violation of property rights? 11/10/09 Tort_A1

‘Property should be put to its most valued use’ The key economic objective for Property Law is too ensure that property ends up in the hands of the economic agent that values it most ‘Property should be put to its most valued use’ This is the very simple efficiency rule 11/10/09 Tort_A1

Property Law and Coase’s Theorem: ‘when transaction costs are zero, an efficient use of resources will occur through private bargaining irrespective of the legal allocation of property rights’ Corollary to the Coase Theorem: ‘when transaction costs are high enough to prevent successful bargaining, then the efficient use of resources will depend on the legal allocation of the property rights’ What are ‘transaction costs’ and why might they be too high? 11/10/09 Tort_A1

If transaction costs are low enough then property will always end up in the hands of the party that values it most (voluntary private trading) – the law is irrelevant BUT If transaction costs are ‘too’ high then the law must ensure ‘efficient’ property allocation (private trades are not possible) 11/10/09 Tort_A1

Six objectives of contract law: 1. Facilitate cooperation through successful bargaining 2. Ensure optimal commitment to performing. 3. Ensure optimal reliance. 4. Supply efficient default terms. 5. Regulating contracts (market failures). 6. Facilitate long term relationships without contracts. 11/10/09 Tort_A1

‘How to ensure that promises will be kept’ The economic theory of contract law is all about ‘cooperation and commitment’. ‘How to ensure that promises will be kept’ Promises, commitment and ‘deferred exchanges’ Legal enforceability lowers the risk of failed promises (broken contracts) and facilitates voluntary private transactions over time This expands the number of Pareto improving trades which are possible 11/10/09 Tort_A1

This generally occurs when transaction costs are too high. Property and contract law deal with interactions among private parties and voluntary exchange Underlying premise - voluntary exchange leads to an efficient allocation of property The law is necessary only when private bargaining will not lead to an efficient result (some trades are not possible) This generally occurs when transaction costs are too high. 11/10/09 Tort_A1

What is Tort Law? Tort law is a third body of ‘private law’ (law governing the interaction between private parties) Interactions between individuals which property law and contract law cannot address very well (or at all). 11/10/09 Tort_A1

People (individual parties) sometimes harm each other: - car accidents - poor medical procedures - slippery sidewalks - fights - faulty products - lies - mean behaviour - etc. 11/10/09 Tort_A1

- intentional/accidental - serious/minor - criminal/annoying Nature of the harm - intentional/accidental - serious/minor - criminal/annoying 11/10/09 Tort_A1

Can you claim that Sears has broken a contract? What if someone suffers one of the above injuries? How might they seek redress? Example: Suppose you slip and fall on Sears’ property at the mall. You suffer a serious back injury. Can your claim that Sears has infringed on your property rights? Your back is not ‘property’ in the legal sense. It cannot be bought or sold. Your body is ‘inalienable’. Can you claim that Sears has broken a contract? You have no ‘contract’ with Sears concerning the use of their floor. You might not even be a customer of Sears. You might simply have been walking through their store on the way to your car. 11/10/09 Tort_A1

A third type of Private Law is required Could you initiates a law suit? Under what body of law can you sue? It must fall within the body of ‘private law’ (some area of law governing the interaction of individuals within the society and not interactions between an individual and the state). A third type of Private Law is required Tort law is a third body of ‘private law’, concerned with compensable wrongs inflicted on one individual by another, that do not arise from breach of contract and that cannot be remedied by injunction. What does this mean? 11/10/09 Tort_A1

Remedies and Relief RECALL Damages is a sum of money that will ‘make the plaintiff whole’ It is ‘backward-looking’ relief An injunction is a court order instructing the defendant to do something, or to not do something, so as to avoid doing harm to the plaintiff It is ‘forward-looking’ relief; an attempt to avert the harm. 11/10/09 Tort_A1

We will see that an injunction is not applicable in tort law. Why? Because the plaintiff must have actually suffered the harm for a tort to have occurred. Many torts are accidents and you cannot ‘enjoin’ someone from having an accident What about enjoining them from taking risk? 11/10/09 Tort_A1