Preliminary Matters

1
Preliminary Matters

• I'm sick Don't get too close
• Lots of coughing, may interrupt things
• Perhaps if you did more of the talking ?
• Remember the assignment
• In addition, each student is expected to pick
  one side of a law case and present, either orally
  or in writing, a case for that side based on
  economic arguments. You may choose any case, past
  or present, provided that the case was not
  actually argued on economic grounds and is not
  discussed in either Law's Order or Richard
  Posner's Economic Analysis of Law. Oral arguments
  should be about ten to fifteen minutes, written
  arguments about three to five pages.
• If on contract or family law should be presenting
  this week!
• Tort Law next week (or Thursday)
• Crime, anti-trust later
• I've managed to get one lecture behind--will try
  to catch up.

2
Tort law

• Can be seen as a Pigouvian Tax
• I take an action that imposes costs on you
• You sue
• I make good the damage
• So the externality is internalized
• Can be seen as a bounty to law enforcers
• You figure out who injured you, prosecute him
• The fine he pays goes to you
• To reward you for catching him
• Can be seen as insurance
• You get injured
• The tortfeasor must make good the loss
• Thus effectively insuring you
• Which may be a good or bad thing

3
What is a tort?

• A wrongful act
• That imposes an externality
• Competition is not a tort, because
• The externality is pecuniary
• What my competitor loses, his customers gain
• Large enough to be worth using the legal system
  to deal with
• Where a liability rule makes more sense than a
  property rule
• My quitting isnt a tort
• Even if it hurts my employer badly
• Because if he wants me, he can always offer to
  pay me more
• I.e. a property rule rather than a liability rule
• And I belong to me.

4
Causation problems

• What does it mean to say I caused your loss?
• That but for me it wouldnt have happened?
• Not that simple. Consider
• Coincidental causation
• I stopped you to chat, then you went on
• And a safe fell on your head
• But for me you would still be alive
• Redundant causation
• Two hunters accidentally shoot a third
• One through the head, one through the heart
• Remove either one and he is still dead
• Probabilistic causation
• My radiation leak raised your risk of cancer a
  little
• When you get cancer, did I cause it?

5
Coincidental causation

• The falling safe
• But for my stopping my friend, he would be alive
• But I couldnt have known that
• Ex ante, my stopping him did not make him more
  likely to die

• We could reward me when I make the safe miss
• But its a lot easier to let the two cases cancel
• Base my liability on the ex ante effect
• Hence Im not liable
• Note that this depends on what I knew
• The man who just pushed the safe might know that
  my stopping my friend would kill him

6
Forseeability

• We dont take the ex ante view in general
• My liability for a car accident isnt the average
  damage I could predict
• But the actual damage
• An issue we will return to
• The general approach is to ask
• What rule will give individuals the right
  incentive
• In taking precautions
• Or anything else
• One problem we will be encountering is
• The same rule may give an incentive on several
  margins
• Tort damages affect the incentive of both
  tortfeasor and victim
• What is the right incentive for the case of
  stopping my friend to talk?

7
Redundant causation

• My damages should equal the extra cost due to my
  action
• But one bullet is enough to kill you, so
• The hunter who shot the man in the head did no
  damage
• With a bullet through the heart you dont need a
  head
• And with a bullet through the head you dont need
  a heart
• So both get off?
• Law as incentive Im deciding whether to go
  hunting
• One cost is that I might accidentally kill you
• But its a little lower if someone else might
  kill you anyway
• So my expected damage payment should be a little
  lower too

8
The Real Case

• Was two fires, not two hunters
• Am I liable for damage due to a fire due to my
  negligence
• If another fire was also started that would have
  burned down the same building?
• Logic of the argument for letting them off is
  correct, but
• That legal rule opens a loophole for
  non-accidental shootings
• And the alternative rules overdeterrence helps
  balance the underdeterrence
• Due to not being able to collect damages equal to
  the full value of a life

9
Probabilistic causation

• Reactor leak raises probability of cancer from
  10 to 11
• You get cancer, sue
• Defendant points out that the chance he caused it
  is only 1/11
• And tort liability requires more likely than
  not.
• Could 100 cancer victims sue jointly, arguing
  that
• Nine of the cases are the defendants fault
• Even though they dont know which nine?

10
Real Case

• Real case DES
• Taken by pregnant mothers, caused a small
  probability of a problem
• When their daughters reached puberty
• In the public domain, produced by many firms, so
  
• No records of who produced which dose
• Court assigned liability by market share, as a
  proxy for
• Probability that firm produced the dose that did
  the damage
• Should the case have been dismissed on
  forseeability grounds?
• Forseeable? Knew or should have known?
• Do we want drugs held back until tested on tens
  of thousands of humans
• For fourteen or fifteen years? What it would have
  taken.

11
Efficient Accidents

• The objective is not zero traffic accidents
• We could get that by not driving
• We could reduce the number of accidents by

• A dagger sticking out of the steering wheel, or
• Wiring the air bag control to a hand grenade
• (Gordon Tullocks suggestions)

• We want only efficient accidents, which means
• Each party should take those precautions
• That save more in expected accident costs
• Than the precaution costs
• If I pay the costs, it is in my interest to do
  that

12
Unicausal Accidents

• Assume the probability of the accident depends on
  only one party
• Strict liability
• I bear my costs, am liable for yours, so bear the
  total cost of the accident
• So it is in my interest to take all precautions
  worth taking
• Negligence
• I am liable if I did not take all cost justified
  precautions
• So if I dont I bear all of the costs
• Which makes it in my interest to take all cost
  justified precautions
• So I do, so Im not liable
• An efficient level of precautions makes me not
  negligent, not liable.
• Strict liability gives you more suits--all
  accidents
• Negligence gives you harder suits
• Since the court must determine not only causation
  and damage
• But also negligence

13
Courts are not Omniscient

• But this assumes the court can tell what
  precautions I do and should take
• Suppose some precautions are either
• Unobservable--the court doesnt know if I took
  them, or
• The court cant tell if I should have taken them
• The usual term in the literature is activity
  level
• The court can tell whether I chose to drive today
  but not whether I should have
• So cant judge me negligent for driving, only for
  how I drove
• Activity level is just one example of precautions
  court cant observe or cant judge
• An efficient level of observable precautions
  makes me not negligent, not liable.
• So a negligence rules results in an efficient
  level of observable precautions, strict liability
  in an efficient level of all precautions
• An argument for strict liability where
  unobservable precautions are very important
• ultrahazardous activities One precaution in
  keeping a pet tiger is not to
• Against if the unobservable are unimportant
  because not worth taking--Annie Lee Turner v Big
  Lake Oil.

14
Dual Causality

• The chance of an accident depends on decisions by
  both parties
• We've been here before--a tort rerun of
• Coase vs Pigou
• Strict liability
• Some way of deciding who is the tortfeasor and
  who is the victim.
• Tortfeasor compensates victim for his loss
• Which eliminates the incentive for the "victim"
  to prevent the loss
• Negligence
• As in the unicausal case, it is in the
  tortfeasors interest not to be negligent
• So he wont be negligent, so he wont be liable
• So the victim wont be compensated
• So it is in the victims interest to take all
  cost justified precautions
• Giving us the efficient outcome

Provided that the court can observe and judge the
tortfeasors precautions
15
Fewer Rules than Meet the Eye

• No liability is the mirror image of strict
  liability
• Instead of tortfeasor pays the whole cost,
  whatever he did
• We have victim pays the whole cost, whatever he
  did
• So it is in the victims interest to take all
  cost justified precautions, but not the
  tortfeasor
• Strict liability with contributory negligence the
  mirror image of negligence liability
• One party (this time the victim) is liable unless
  he takes all cost justified precautions
• So he does, so he isnt liable, so
• The other party bears all the costs--making it in
  his interest to take all cost justified
  precautions.
• Back to Coase "Tortfeasor" and "Victim" are not
  well defined
• "Victim" Party who bears the cost if the legal
  system does nothing?
• But an auto accident usually damages both cars.

16
Choosing a Rule

• We can work through the logic in
• My simplified world
• Only cars get hurt (victims), only tanks get sued
  (tortfeasors)
• Cars never run into cars
• If precautions by tanks are important, by cars
  are not
• Strict liability gives the tanks the right
  incentive
• The cars have the wrong incentive, but it doesnt
  matter
• If precautions by cars are important, by tanks
  are not
• No liability gives the cars the right incentive
• The tanks have the wrong incentive, but it
  doesnt matter

17
If Both

• If precautions by both are important
• Negligence liability gives both cars and tanks
  the right incentive, if the court can tell
  whether tanks are negligent
• Strict liability with a defense of contributory
  negligence gives the right incentive, if the
  court can tell whether cars are negligent
• What if there are important unobservable
  precautions by both cars and tanks?
• Tank pays a fine, but not to the car--double
  liability. But who reports the accident?
• Tank partly compensates car, so both have some
  but not enough incentive Coinsurance
• Court tries to distinguish cases by which partys
  unobservable precautions matter more?
• My world is artificial, but consider product
  liability. Manufacturers are tanks
• An exploding coke bottle hurts the customer
• Not Coca Cola
• Maybe

18
Amount of damages

• Pigouvian rule charge the amount of the
  externality
• Thus internalizing it, so tortfeasor takes the
  right precautions
• Tort rule make the injury whole. That sounds
  like the same thing
• But not all torts result in a successful suit, so
  
• Tortfeasor faces a probability lt1 of paying
  damages
• So is underdeterred
• Although he also may have legal costs, which
  overdeter?
• How should we take account of legal costs?
• When result of committing a tort is that someone
  may sue
• Which leads to legal costs for both parties
• Are they part of what we must make good?
• Stay tuned--more next week

19
Punitive damages The Exception

• History
• Until recently rare, some question whether they
  existed
• Early cases Kings messengers, shooting birds in
  someone elses field
• Within the past century that changed
• Awarded for deliberate or reckless tort
• No legal limit on or rule for the amount
• Theories of punitive damages, none entirely
  satisfactory
• Dont exist--a misunderstanding of damages for
  real but hard to measure costs
• Exist to express moral disapproval. Why give the
  money to the victim?
• Exist to compensate for underterrence of torts
  often not successfully prosecuted (LP) Why
  reckless torts, which are almost sure to be
  prosecuted?
• Exist to play safe where overdeterrence is not a
  problem (LP) Why cant a tort be deliberate and
  efficient?
• Exist to set damagesgtharm done where it is
  efficient to do so (DF)
• Exist to deter strategic torts (DF)

20
Taking account of enforcement costs

• The standard Pigouvian account ignores the cost
  of imposing the tax
• But criminals have to be caught and punished
• Tortfeasors have to be identified and
  successfully prosecuted
• If a tort does net damage of 100--1000 harm,
  900 benefit
• But deterring it costs 200
• It is more efficient not to--by setting a
  punishment lt900
• We will do this in more detail with criminal law,
  but What is the cost of deterring one more
  offense? What is the benefit? Keep doing it
  until benefitcost for the next one. At which
  point ltPgtD-MC of deterrence.

21
Verbal Version

• Suppose some sort of tort is easily deterrable
• A small increase in damages awarded ? a large
  decrease in torts
• If it doesnt happen it doesnt have to be
  litigated
• So marginal cost of deterrence is negative--more
  deterrence, less cost
• So deter all inefficient offenses, plus slightly
  efficient ones
• To save the cost of punishing them
• But if a tort is hard to deter
• Higher damages ? more litigation cost/tort,
  almost as many torts
• Marginal cost of deterrence is positive--more
  deterrence, more cost
• So only deter offenses that are inefficient
  enough to be worth
• The cost of deterring them

22
Punitive damages for deterrable torts?

• Auto accident--tort as byproduct
• Avoiding it is costly--not driving, precautions
• So perhaps changing damage level only has a small
  effect
• So ordinary damagesltdamage done
• Make whole but with narrow definition of costs
• And no adjustment for probability of collecting
  damages
• Beating someone up--tort as product
• If you are doing it deliberately it costs nothing
  not to
• So perhaps it is easily deterred
• Explaining punitive damages for deliberate torts?
• But
• If you have strong reasons to do it, then
• There can still be a large cost to not doing it
• You dont get the satisfaction of beating him up
  for insulting you
• So perhaps not so easily deterrable

23
Strategic Torts

• Consider the bully back in the game theory
  chapter
• He beats up A to deter B and C from doing things
  he doesnt want them to
• If ordinary damages dont fully compensate
• Then B and C may well be deterred
• So the real damage done isnt just to A
• If we impose punitive damages then
• B and C expect to be more than fully compensated,
  so arent deterred
• And the damages better reflect the real harm
• Consider the early cases
• I humiliate you by shooting birds on your land
• To deter other landowners from challenging my
  dominant political position
• So punitive damages make sense
• The Kings messengers mistreat a suspected author
  of seditious writings
• To give other people an incentive not to do
  things that will get them suspected of it
• So

24
Why pay the victim?

• Argument against--Coaseian double causation
• If we eliminate the cost to the victim, we also
  eliminate
• His incentive not to be a victim
• Argument for Tort as bounty
• It gives the victim an incentive to report and
  prosecute
• Why give it to him instead of someone else?
• He is likely to be the chief witness, and
• He already has some incentive--to deter torts
  against himself
• Argument for Tort as insurance?
• Argument for We have to give it to someone
• Tort law is really a system of private
  prosecution, and
• A private prosecution system needs some way
• To allocate the right to prosecute

25
Product liability law

• Caveat Emptor, Caveat Venditor, ?
• Who pays when the coke bottle blows up
• Buyer (for his medical costs) or Coke?
• Caveat venditor Seller is liable for (some? All?
  Invisible?) faults
• Gives producer an incentive to efficiently reduce
  faults
• Since he will pay for them. But
• That is only a problem if buyer is poorly
  informed
• If buyer knows that one coke bottle in a thousand
  explodes
• That lowers what he is willing to pay for a
  bottle of Coke
• Which gives Coke an incentive to watch their
  quality control
• Reduces buyers' incentive to take care in using
  the product. Coase.
• Caveat emptor Buyer takes the goods as he finds
  them
• The right answer if the main cause of problems is
  buyers choices, or
• If buyer is well informed so reputation gives
  seller an adequate incentive

26
Freedom of Contract?

• Problem Joint causation
• Caveat emptor plus sellers reputation works.
• How about caveat venditor plus buyers
  reputation?
• How about coinsurance? Partial liability, put the
  incentive where it does the most good
• Or more complicated rules, such as
• Caveat emptor for some sorts of defects, caveat
  venditor for others, or
• Some version of negligence or strict plus
  contributory negligence
• Suppose we let parties agree on the rule
• If the default is caveat emptor, seller can
  provide a guarantee
• If it is caveat venditor, buyer can sign a waiver
• Still depends on the buyers information, but
• Buyer doesnt have to know if this bottle is
  defective
• Or what fraction of bottles are defective
• Only whether the guarantee is worth more to him
  than its price

27
Tort as insurance?

• Tort is sometimes seen as insurance
• If you get injured, you get compensated
• Makes sense as risk sharing?
• Only if tort feasors can better spread risk
• But it makes very poor insurance, because
• It only covers a small subset of losses, and
• Forcing someone to pay is more expensive
• When it is in his interest to have a reputation
  for not paying
• Than when it is in his interest to have a
  reputation for paying
• Why buy insurance if they wont pay?

28
Value of Information

• Information is valuable because it affects
  decisions
• So value depends on how likely it is to change
  the decision
• And how large the benefit of the change is
• Suppose a good costs 10
• It has an unknown defect that reduces its value
  by ten cents
• There will be a very few people who value it at
  more than 10 but less than 10.10
• They will buy it, net social loss per purchase
  between zero and .10
• Suppose the defect reduces value by 1.00
• About ten times as many people with values
  between 10 and 11
• And the net loss for each is between zero and 1
• So, roughly speaking, the social loss goes up a
  hundred fold when the importance of the defect
  goes up ten fold
• More generally
• Not only does the social cost of ignorance of
  defects increase with the importance of the
  defect
• It increases more than linearly--roughly as the
  square
• So warnings and such are much less important for
  small defects
• Note that size here is
• Not the amount lost when the coke bottle
  explodes, but
• The effect of the risk on the value to a fully
  informed customer
• Roughly the amount of damage times its
  probability

29
The threat of Global Cooling

• We have some reason to expect warming over the
  next century
• No special reason to expect cooling, but
• Earth is in an ice age
• We, fortunately, are in an interglacial
• Which typically last for tens of thousands of
  years
• This one might start ending in five thousand
  years
• Or next Friday
• Global warming, at levels currently predicted
• Raises temperature 2C in a century
• Raises sea level a foot or so
• The typical glacial
• Covers Canada, England, Scandinavia, much of
  northern U.S. in ice
• A mile thick over Chicago. What was Chicago.
• Drops sea levels 500 feet or so, putting existing
  ports far inland.
• Considering both probability and magnitude

30
Eggshell Skull Vosburg v Putney

• Suppose I carelessly hit you with a golf ball
• It just happens that you are recovering from an
  auto accident
• And the golf ball reshatters your healing skull
• Doing enormous damage (The real case is even
  odder and somewhat suspicious)
• Should damages be calculated
• By actual damage done, or by
• What the tortfeasor could expect the average
  damage to be?
• Actual damage done results in the right incentive
  for the tortfeasor
• Because, before teeing off, you average in the
  (unlikely) eggshell skulls
• The cyclists wearing protective helmets
• And everything between
• And the court can measure actual damage instead
  of estimating the average
• While ignoring the other tail--the case where
  there was no damage, no suit
• But--double causation. Consider the victims
  incentives
• He (probably) knows he is especially vulnerable,
  so, unlike the tortfeasor
• Can take especially stringent precautions
• Such as wearing a biking helmet when walking past
  a golf course

31
Should Damages Payments be Lump Sum?

• You persuade the court that I have tortiously
  crippled you
• An estimated twenty years of lost employment,
  50,000/year
• Should you get a million now?
• Or 50,000 each year you stay crippled?
• (ignoring complications of accumulated interest)
• What is the argument for the lump sum?
• Against?

32

• Traffic on the highways ... cannot be conducted
  without exposing those whose persons or property
  are near it to some inevitable risk and that
  being so, those who go on the highway, or have
  their property adjacent to it, may well be held
  to do so subject to their taking upon themselves
  the risk of injury ... and persons who ... pass
  near the warehouses where goods are being raised
  or lowered, certainly do so subject to the
  inevitable risk of accident. In neither case,
  therefore, can they recover without proof of want
  or care or skill occasioning the accident ... .
  Blackburn, J. (Fletcher v. Rylands L.R. 1 Ex.
  265 (1866))