cost of safeguards = C(s1) + C(s2)
Goal: make both choose the efficient level of precautions:
|dPr/dS| x L =
MCsi1
|dPr/dS| x L =
MCsi2
Efficiency => make each negligent party liable for the full amount of damages
IV. Tort
D. Liability
2.
Victim fault
b. Economic analysis of legal options
Handout result: All negligence rules yield the same incentive: neither side is negligent, "provided that the law defines due care--as it does--as the care that is optimal if the other party is exercising due care." (P173)
Since efficiency is not
enhanced by making the negligent injurer pay damages to the negligent victim, the common
law traditionally allowed the cost of the accident to lie where it fell, in order to
minimize the costs of administering the legal system. (P174)
=> contributory
negligence --> fewer cases
Comparative negligence entails
a transfer payment that generates no allocative gain and transfer payments involve
administrative costs. (P174-5)
This requires the expenditure of additional resources by the parties
and the courts, and by making it harder to predict the extent of liability may increase
the rate of litigation. (P175)
Both contributory negligence and comparative negligence -->
uncertain legal outcomes and uncertain effects on the amount of care taken by injurers and
victims (P175)
Comparative
negligence makes most economic sense when
society wants to use the tort
system to provide insurance to
accident victims, because it gives the careless victim of a careless injurer something;
contributory negligence gives him nothing.
But why in an age of much more widely available market insurance than
when contributory negligence held sway in tort law there should be a desire to provide
insurance through the tort system is a mystery to the positive economic theorist of the
common law. (P175)
3. Strict liability
Escola (p) v. Coca Cola Bottling Co. (d), 24 Cal. 2d 453 (1944)
Illustrates doctrine of "res ipsa
loquitor"--"the thing speaks for itself"
defendant negligence can be inferred by ruling out alternative
causes
For the plaintiff:
good news: you do not have to prove exactly what defendant did
bad news: you have to narrow causation down to the defendant
another equally likely injurer
=> failure to achieve preponderance of evidence
Court concluded that plaintiff satisfied this requirement
case discusses strict liability
Strict tort liability means that someone who causes an accident is liable for the victim's damages even if the injury could not have been avoided by the [injurer's] exercise of due care. (P177,6th)
the most interesting part
of the case is the concurring opinion
"The liability of the manufacturer to an immediate buyer injured
by a defective product follows without proof of negligence from the implied warranty of
safety attending the sale."
"It is evident that the manufacturer can anticipate some hazards
and guard against the recurrence of others, as the public cannot.
"It is to the public interest to discourage the marketing of
products having defects that are a menace to the public. If such products nevertheless
find their way into the market it is to the public interest to place the responsibility
for whatever injury they may cause upon the manufacturer, who, even if he is not negligent
in the manufacture of the product, is responsible for its reaching the market."
the issue: Do we follow a rule of caveat emptor (let the buyer beware), under which the buyer takes the good as he finds it, complete with any defects, or a rule of caveat venditor, under which, if anything goes wrong, the seller is laible? (F213)
advantage to
caveat emptor: avoids lawsuits
advantage to caveat venditor: sellers may be low-cost avoiders of
damage
assign liability to the side with
better information (F215)
Better seller
information
=> apply caveat venditor
=> seller insures product.
(F214)
encourages sellers to exploit all
safeguards, observable and unobservable
[because of undercompensation for loss in practice] even with tort
rules that make someone else liable, most of us still have at least some incentive to
avoid being victims [a form of coinsurance] (F215)
In general, true insurance is
preferable to tort insurance:
Insurance policies have two important advantages over liability law as
mechanism for protecting people from risk. The first is that liability law is too
selective.... A second advantage ... is that an insurance company wants a reputation for
being generous out benefits.... (F215)
Even with caveat emptor: parties can still assign liability by contract, rather than tort law (F216)
4. Joint liability
Summers (p) v. Tice (d) 33 Cal. 2d 80 (1948)
illustrates
joint torts => multiple possible or actual causes
court decision:
"each defendant is liable for the whole damage whether they are deemed to be
acting in concert or independently."
the plaintiff is not denied relief "simply because he cannot prove
how much damage each did, when it is certain that between them they did all...."
usual legal rule: defendants are subject to
| "joint | and several liability | with contribution" |
| Victim can sue all injurers... | or any of the injurers for the full damage, | with compensation from each injurer subtracted from the total balance owed. |
"with contribution"
limits recovery to value of loss
In Summers v. Tice: "The wrongdoers should be left to work out
between themselves any apportionment."
What inefficiency could result if the victim collected the full loss from both?
Economic analysis of joint liability:
Ex: seatbelts--contracted out
by a carmaker: effectiveness depends on how well they are constructed and how well they
are anchored
both parties can help avoid injury, but the injury is external to both
|
expected loss = P(s1,s2) x L cost of safeguards = C(s1) + C(s2) Goal: make both choose the efficient level of precautions: |dPr/dS| x L =
MCsi1 Efficiency => make each negligent party liable for the full amount of damages |
|
Notice how this
parallels victim fault: it doesn't matter how liability is shared, since each party can escape
entire liability by avoiding negligence, each has incentives to take all cost-effective
safeguards.
Only negligent parties will be left with the tab
Since it is not economically rational to be negligent, each must
anticipate being the only negligent party and therefore responsible for the entire loss.
Sindell (p) v. Abbott Laboratories (d), 26 Cal. 3d 588 (1980)
illustrates
probabilistic causation
Pr1: the action caused the injury
other causes are possible and there is no direct proof of responsibility for the specific
injury under litigation
Pr2: the defendants include the injurer
other possible injurers exist
| Alleged cause (Pr1) --> | Defendant(s) responsible (Pr2) | -->Harm |
| Others responsible (1-Pr2) | ||
| Other possible causes (1-Pr1) |
Preponderance of evidence => Pr1 * Pr2 > 50%.
Remedies for Pr1:
Friedman: assemble a large enough group of victims so that
there is a > 50% chance that one of them was harmed by the alleged cause.
If the alleged cause raises probability of cancer by 10%,
then get at least 7 cancer patients to sue for 1 incident of cancer from the
alleged cause ((1-0.1)7 = 48% => P1 = 52%)
Posner's remedy in a nuclear radiation example: "[T]ort law might be well advised to consider defining the injury as the increased risk of death from cancer, rather than as the cancer itself. Then the whole population exposed to the burst of radiation would be able to sue when the accident occurs, using the class action device ... to economize on the cost of litigating many small claims." (P184-5)
Sindell v.
Abbott Labs focuses on Pr2--no direct proof of injurer identity
"There is an important difference between the situation involved
in Summers and the present case. There, all the parties who were or could have been
responsible for the harm to the plaintiff were joined as defendants. Here, by contrast,
there are approximately 200 drug companies which made DES, any of which might have
manufactured the injury-producing drug."
But "Should we require that plaintiff identify the manufacturer
which supplied the DES used by her mother or that all DES manufacturers be joined in the
action, she would effectively be precluded from any recovery."
Court
remedy for Pr2:
(1) sue "a substantial percentage" of all possible suppliers
(2) make each defendant's damage share = its market share
Postscript: The
follow-up trial also reached the California Supreme Court:
Brown v. Superior
Court (Abbott Labs),
44 Cal. 3d 1049, 245 Cal. Rptr. 412, 751 P.2d 470, (1988)
another opinion written by Stanley Mosk: court supported a
trial court peremptory ruling that the labs could not be held strictly liable
for the harm (appealed by the plaintiffs)
The court ruled for the defense that "a defectively designed drug
should not be measured by the standards of strict liability ... because of the public
interest in the development, availability, and reasonable price of drugs..." Drug
manufacturers should instead be subject to a negligence standard which "would impose
liability on a drug manufacturer only if it failed to warn of a defect of which it either
knew or should have known."
E. Damages (D)
This is where the Posner
thesis is least convincing
There are many deficiencies in the way the common law handles damages
But the economics is messy too, complicated by irreconcilable
differences
1. The economics of damages
a. Efficiency issues
incompatible efficiency goals:
Goal 1: efficient precaution by injurer: Damages (D) = loss (L)
If probability
of being found liable (Prl) < 1
=> Expected damages = Prl x D
Efficiency => Prl x D = L
=> D = (1/Prl) x L
where 1/Prl = "probability multiplier"
Example: Prl =
0.5 => probability multiplier = 2
=> If L = $100K, then D should = $200K
In general, If Prl<1, then efficiency => D > L
Goal 2: efficient precaution by victim: D = 0
D > 0 => moral hazard
D > L => incentive to be a victim
Goal 3: encourage enforcement through private suits
D = opportunity cost of victim (time + legal exp.)
There are three good reasons for giving the right to prosecute to the victim.... One is that the victim is the person most likely to know that the tort occurred.... A second is that the victim is likely to be an important witness.... A third reason is that the victim has an additional incentive to prosecute: [to] deter future offenses.... (F212)
overall: an impossible task--one tool for 3 purposes
| D = | (1) > L (2) = 0 (3) > O/Cvictim |
b. equity issues
equity goal:
compensation to the victim
=> "enough to
make the victim whole," ... as well off as if the injury had not occurred.
(F219)
= restitution damages
(vs. expectation damages for contracts)
=> tort law as insurance
accident
insurance is likely more efficient for compensation
<-- cheaper to administer
c. Valuation issues
(1) Temporary versus permanent damages
--Temporary
damages (periodic-payments):
easier to estimate
But: court remains involved over time
creates disincentive
for victim to recover from injury
--Permanent damages:
| D1 | D2 | Dn | |||
| present value formula: | ------ | + | ------- | + ... + | ------- |
| (1+r) | (1+r)2 | (1+r)n | |||
Many variables
to estimate:
stream of future damages
time horizon of harm
appropriate discount rate
creates incentive for victim to exaggerate extent and duration of harm
(2) Valuing intangibles
(a) Life
Option 1: PV of future earnings
overlooks nonpecuniary benefits: leisure,
companionship, pleasure
also => rich "worth more" than
poor
Option 2: implicit valuation
parallels the Hand formula:
|dPr/dS x L| = MCs
=> |L| = MCs / |dPr/dS|
Example: people buy smoke alarms
Cost = $100
Reduced Pr(death by fire) = .0001 (1/100th of
1%)
Implicit value of life = $100 / .0001 = $1M
In practice, this is very
conservative since it is reliable only over a small reduction in risk.
People will pay much more for a large reduction in risk.
(b) Pain and suffering
Loss of enjoyment of
life.
=> can take a lot of money to restore utility since a
disabling injury
=> each dollar provides less utility after the injury than
before
2. Damages under the law
a. Actual versus foreseeable damages
Vosburg (p) v. Putney (d), 80 Wis. 523 (1891)
illustrates that "[a] tortfeasor takes his victim as he finds him." (F217-8)
"The rule of damages in actions
for torts[:}... the wrong-doer is liable for all injuries resulting directly
from the wrongful act, whether they could or could not have been foreseen by
him. ...
=> responsible for
actual damages
give[s] potential tortfeasors the right average incentive to take
precautions (F220)
Friedman notes that
this contrasts with Hadley v. Baxendale which denied unforeseen damages--loss of
profits due to broken mill shaft
What
was the incentive gain from the Hadley v. Baxendale decision?
Note the difference:
much lower information costs in a contract than in possible tort situations.
b. Damages for intangibles
(1) wrongful death
Wycko
v. Gnodtke, 361 Mich. 331
(1960)
Ex: A negligent driver (d) kills a 14-year old pedestrian (p)
illustrates damages for pecuniary loss in the event of death
= lost income minus victim's living expenses
As noted in dissent: "It is undisputed that at common law there was no right of action for damages for negligently or feloniously causing the death of a human being."
Rationale: impossible to compensate the victim (claim dies
with the victim)
[What is the
value of life?] "The traditional common
law answer, oddly enough, was "nothing." This may have been ... a result of
viewing tort damages as compensation to the victim rather than disncentive to the
tortfeasor.... Legal reforms in the mid-nineteenth century made it possible for your wife
and children to sue for the cost to them of your dying, roughly speaking for your future
income minus the amount of it that you would have spent on yourself." (F96)
Statutes allow damages for pecuniary loss:
present value of lost earnings minus victim's living expenses
=> perverse incentive: if you run over a pedestrian, back
up
since if victim survives disabled, damages = present value of
total foregone earnings including living expenses
Results of common law approach: Overlooks other victims through loss of
companionship
+ Risks substantial potential under-deterrence
Friedman proposes that we allow individuals to benefit from their future death benefits through reverse insurance: sell off future claims for tortious loss of life, and let the buyer collect.
Why do these institutions not exist; why is there no market on which you can sell your future claims for the tortious loss of your life?... The first [answer] is that ... traditional common law did not award you or your estate damages for the loss of your life, on the principle that the claim dies with you.... The second and related reason is that the common law does not treat tort claims as transferable property.... [Y]ou cannot sell your claim to future damage payments. (F100)
My additional concern: I worry about the incentive effect of putting others in a position in which they have a financial stake in my untimely demise
(2) pain and suffering
Hunt (p) v. K-Mart Corp. (d) 981 P.2d 275 (1999)
A products liability case. Plaintiff fell from a defective office chair. At the trial, Plaintiff presented evidence from a psychologist and an economist who valued her damages from loss of enjoyment of life. These experts calculated Hunt's hedonic damages by assessing a percentage of loss suffered by her in each area of her life on a "loss of pleasure of life scale" and then inserting those percentages into a formula which translated the losses into actual dollar amounts. According to the expert testimony, the monetary value of Norma's loss of enjoyment of life was $228,526.The Supreme Court of Montana upheld the introduction of this evidence.
illustrates hedonic damages for pain and suffering--personal value of loss of enjoyment of life
not clear how the
court would have ruled if K-Mart had challenged hedonic damages earlier.
No systematic progress in this direction, but an emerging
trend
So, recent trend toward more generous damage awards
Common law tradition has been to under-compensate
(1)
defines damages narrowly:
no compensation for pain and
suffering
not counting the value of life to the
deceased
(2)
does not apply a probability markup
"punitive damages" allowed
only for "deliberate or reckless" torts
(3) Under the "American Rule," victims pay their own legal costs
So victims are not made whole
Benefit: it is not profitable to be a victim, so potential victims retain an incentive to take some precautions
All things considered: the common law in many respects promotes efficiency but it falls short in some important respects as well.