Academic journal article The University of Memphis Law Review

The Best Welfare Point: A New Compensation Criterion and Goal for Tort Law

Academic journal article The University of Memphis Law Review

The Best Welfare Point: A New Compensation Criterion and Goal for Tort Law

Article excerpt

I. INTRODUCTION

This Article proposes in-depth analysis of alternative tort law criteria for compensating victims of wrongful acts in search for an optimal compensation criterion. I am particularly interested in finding out whether this ideal "best welfare point," if it exists, is the damage awards ("DA") criterion that tort law currently applies. My basic notion is that social welfare would be at its highest welfare distribution and justice, in terms of efficiency, if, in each tortious event, the law obligated the injurer to pay the victim not only her damages, but her damages plus half the added profits derived from the taking. I name this criterion the Best Welfare Point ("BP").

I subscribe to the idea of torts as takings. I define "taking" as an event in which an individual unilaterally and forcibly appropriates another individual's entitlement, meaning an interest protected by tort law: her property right, for example, or her right to bodily autonomy. To illustrate this point, I provide some examples of different kinds of tortious events, such as physical injury or property damage, medical malpractice, occupational injury due to hazardous manufacturing operations, and a cellular company mounting a new antenna in a densely populated area. I consider all of these activities to be takings.

In light of my view of torts as takings, I justify BP's existence and potential as a preferable goal for tort law with reference to five major methods or theories. First, using neoclassical economic analysis of law, I consider circumstances in which a potential injurer might wrongfully take an entitlement in a competitive setting, namely tortious entitlement markets. Markets in which the parties to the forced transfer know the market price-an accident breaking a car window, for example-characterize competitive entitlement settings. In this section, my main argument is that the DA tort-law criterion does not enable liability rules to mimic the operation of free and competitive markets. Instead, it creates markets with a legally enforced perfect price discrimination of sellers, whereby buyer-injurers are taking entitlements at the seller-victims' expense. This in turn leads to entitlement markets' worst-case antitrust scenario, whereby the market supply of tort entitlements widens with more takings-many of them inefficient. This phenomenon reflects total destruction of free and competitive tort entitlements markets, leading to excessive transactions in goods and services markets, in which tort entitlements serve as commodities, and ultimately to inefficient resource allocation. The BP criterion optimally mimics the operation of free and competitive markets by offering to the parties the theoretical values to which they would have been entitled in those markets: normal profits for the buyer-injurer equal to their consumer surplus and normal profits for the seller-victim. This criterion ensures efficient takings in entitlements markets, leading to a reduction in aggregate tortious entitlement takings and to the potential injurers considering the true value of the potential victims' entitlements. In products-and-services markets, in turn, the takers-who now pay the true value of commodities, including tort entitlements-would produce efficiently with the outcome being efficient allocation of resources.

Second, a potential injurer may also take an entitlement in a non-competitive setting that is so unique that the parties to the forced transfer cannot rely on any known market price and must bargain-for example, an accidental event that injures an individual. Using game theory considerations in bilateral-bargaining settings, and given that courts' measurements errors are systematically biased in favor of either potential injurers or victims, DA cannot ex ante ensure that only efficient takings occur. If injurers estimate that a biased error in their favor is probable, they have rational incentives to become involved in too many takings, some of them inefficient. …

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