V. Torts
    A. The economics of tort liability
    Basic analysis (cont'd.)

    Strict liability makes the tort system an insurance system
    Manufacturers build expected liability costs into the prices of their products
    Those costs include litigation costs, so a pretty expensive insurance system

    1. Complication 1: moral hazard

    With strict liability for damages, how does a potential victim feel about being injured compared to not being injured?

    So how careful will a potential victim be?

    strict liability for damages provides no incentive for potential victims to take precautions
    if victim precaution is not feasible, then strict precaution is efficient

    How do we make car owners choose the efficient level of victim precaution?
    i.e., make them internalize the expected harm to themselves

    no liability for damages provides incentives for the victim to choose the efficient level of precaution

    So how can people get compensated for their losses?
    Insurance contracts: we do that for many related purposes now: auto insurance, homeowners' insurance, life insurance, disability insurance
    If you suffer a loss, it doesn't matter whether someone wronged you or not--you are still worse off than before
    Insurance offsets at least part of the loss

    result is a contradiction: with no liability, the injurer will not take any precautions

    How do we get both sides to take precautions?

negligence = failure to take all cost-justified precautions     negligence rule: an injurer is liable only if negligent     result:     injurer chooses efficient precautions     victim chooses efficient precautions too since the victim will not be able to collect damages from a non-negligent injurer

    2. Complication 2: unobservable precautions

    What if the efficiency of some classes of precautions is observable by the actor but not the court?
    The usual example is "activity level." The court may be able to observe how many trips drivers take, but not how much each trip is worth.
    Another example would be how much attention drivers pay to their driving.

Under a negligence rule, you take the optimal level of the observable precautions     you will therefore not be found negligent     you therefore ignore costs to other parties in choosing the level of the unobservable precautions.     First-best remedy:     fine the injurer under strict liability     pay no damages to the victim     that's how criminal law works     Advantage: efficient precautions by both sides     Disadvantage: enforcement costs        --relies on public enforcement

    When we convert the damage payment into a fine we also convert the offense from a tort to a crime and must shift the enforcement mechanism from private law suits to enforcement by the state (F204)

    Second-best remedy: assign liability for negligence to the party with the fewest options for unobservable precautions.
    the other party will have an incentive to take all efficient precautions
    the only loss will be the unobservable precautions by the party with the fewer options to take them
    Stated in the reverse: [I]f Posner's conjecture that the common law is efficient is correct, courts should tend to impose strict liability for torts where potential tortfeasors vary a great deal.... I do not know whether such a pattern exists.... (F205)

    Option 1: negligence makes the victim take all efficient precautions
    Option 2: strict liability with contributory negligence makes the injurer take all efficient precautions

    Ex: drugs
    manufacturers have a lot more information about drug safety
    consumers who do not follow warning labels are negligent and cannot collect for adverse effects
    if you follow directions and still get injured, then you have a case
    it reverses negligent party: the drug company pays unless the customer was negligent

    Recap:
    Observable behavior = care
    Unobservable behavior = activity level

    3. The economics of tort litigation

    a. Why is anyone found liable for negligence?

    With perfect information, this would never happen, but we lack perfect information

    Injurer error (true negligence)

• miscalculates cost-efficient precautions
• gambles on escaping detection and/or liability

    Court error (false negligence)

• miscalculates cost-efficient precautions
• applies a "reasonable person" standard
      if you are a better than average driver, your cost-efficient speed might exceed the speed limit
      => you will be liable for harm even though you are not truly negligent and are behaving efficiently

    Court errors have an uncertain effect on incentives --it depends on what sort of errors the court makes, and we don't know the answer to that question

• Completely random court errors --> under-precaution (since you escape liability some of the time)
• Perfect information about the precautions you did take but court error about the precautions you should have taken (efficient precaution) --> over-precaution (since you can reliably reduce the chance of liability with extra precautions)

    All parties will find it in their interest, if an accident occurs and someone is sued, to spend resources trying to generate court errors in their favor. (F204)

     b. litigation costs under alternative liability rules

    Negligence could lead to either more or less litigation cost than strict liability

    Why higher with negligence?

• one more question to be settled (negligence)
• more accidents, due to underutilization of unobservable precautions

    Why lower with negligence?

• reduces cases where plaintiff has no claim because the injurer was obviously not negligent

    V. Torts

    B. Harm

        Winn Dixie Stores, Inc. (d) v. Benton (p)Winn Dixie Stores, Inc. (d) v. Benton (p) 576 So.2d 359  (1991)

1. What are the facts of the case?
2. Why does the plaintiff claim that damages are justified?
3. Why does it matter how long the milk has been on the floor?
4. How careful does the court expect Winn Dixie Stores to be?
5. What is the economic reason for not automatically holding Winn Dixie Stores liable (i.e., strict liability)?

    illustrates a standard tort case

    2 parties:
    victim
    injurer = tortfeasor

    Impossible to isolate the 4 ingredients we are examining--harm, cause, liability, and damages--since by definition we must have them all in order to have a tort, but this case provides a good illustration of a basic harm

    A harm moves you to a lower indifference curve

    Harms are not always torts

    1. With a negligence rule, a tort => a harm in which the injurer does not exercise "reasonable care"

    Analogous to nuisances and external costs: Per Coase: "to quote Posser on Torts, a person may make use of his own property or . . . conduct his own affairs at the expense of some harm to his neighbors. He may operate a factory whose noise and smoke cause some discomfort to others, so long as he keeps within reasonable bounds. It is only when his conduct is unreasonable, in the light of its utility and the harm which results [italics added], that it becomes a nuisance." (Coase 11)

    Likewise with torts, some of the harms we suffer at the hands of others turn out to be efficient
    an efficient harm = an accident instead of a tort

    This option for escaping from liability encourages the victim to exercise reasonable care too.

    an inefficient harm = a "wrongful" harm = a tort