Economics of the Law: Torts, Contracts, Property, Litigation

By Thomas J. Miceli | Go to book overview

TWO
THE ECONOMICS OF TORT LAW
The Basic Model

From an economic perspective, tort law is concerned with internalizing the costs associated with accidental harm. This chapter develops the basic accident model that economists have employed to examine the structure of tort law.

The economic analysis of tort law is primarily concerned with the incentives that various assignments of liability create for injurers and victims to take precautions against accidents. 1 In most accident settings, if injurers do not face the threat of liability for the victims' injuries, they have no incentive to take precautions because the victims' costs represent an externality. 2 Alternatively, if victims always expect to be fully compensated for their injuries, they too will have little or no incentive to take precaution. This two-sided "moral hazard" presents a difficult problem for tort law, and the economic model of accidents (the model of precaution) shows how negligence rules elegantly solve it. More broadly, the basic principles that arise from this analysis turn out to be applicable to problems in both contracts and property, thereby demonstrating the ability of the model to provide a unifying framework for the economic analysis of law. 3

The first section of the chapter develops the basic accident model and examines the effect of various liability rules on the incentives of injurers; and victims. It is therefore largely normative. The second section takes a more positive approach by examining the well-known Hand test for negligence and the role of causation requirements in the economic model. The third section considers the question of whether standards of care for negligence (or any legal standard) should be individualized or based on a representative person (the so-called reasonable person). The fourth section examines the role of activity levels as distinct from precaution as determinants of accident risk. Since an important example of an injurer's activity level is the number of units of a dangerous product produced by a manufacturer, the economics of product liability is examined in this section. Finally, the fifth section considers several issues relevant to the determination of damages: specifically, whether damage awards should be individualized or based on the losses of the average victim, the impact

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