Download Strict Liability for Businesses - Economics of Law - Lecture Notes and more Study notes Economics and Law in PDF only on Docsity! ECON 522 - DISCUSSION NOTES ON TORT LAW-2, LEGAL PROCESS-1 1. Strict Liability for Businesses Usually strict liability leads to efficient precaution by injurers, but too little precaution by victims. However, if victims are customers of a business and the business is the injurer, then the market can actually force efficient precaution (in the form of activity levels) via prices. Example 1- My New Bandsaw. Suppose I’m deciding whether or not to buy a new bandsaw for $500. I think I’d like to build things, and I decide I value the saw at $700. However bandsaws are dangerous, and there’s a chance that over the lifetime of the saw I’ll cut off one of my fingers. Suppose there’s a 1/100 chance that this will happen, and if it does then it costs me $60,000. 1. If I know that there’s a 1/100 chance I’ll cut one of my fingers off, what is the true cost of the bandsaw if I choose to purchase it? Is it efficient for me to buy it? Will I buy it if the remedy is simple negligence (assuming the firm is not negligent)? 2. Suppose I do not perceive this risk. Will I buy the saw for $500? What would happen in a competitive market if the law were changed to strict liability and all other consumers have the same cost/probability of a lost digit? 2. Errors in Tort Remedies We’ve introduced two types of remedies for torts: strict liability and negligence. Under either rule, the court must decide what to set damages D at, and it may make mistakes. The two types of errors in setting D are: 1. Random Errors: The court may make mistakes, but on average damages are set correctly (equal to actual harm done) 2. Systematic Errors: The court consistently sets damages too high or too low (above or below actual harm done). For strict liability, random errors have no effect, since all that matters is expected damages. How- ever, systematic errors will lead to either too much precaution (if damages too high), or too little precaution (if damages too low). What’s more subtle is the effects of the errors for negligence rules. The graph below is the social and private costs of precaution. 1 Docsity.com Because of the discontinuity in the private cost function, small errors in setting D have no effect on behavior. However, random errors in setting xn will tend to make people take more precaution (risk averse), while systematic errors in setting xn will lead to people taking the inefficient level of precaution xn. Story: Imagine you’re driving through a new town and you’re not sure how fast you can drive without getting pulled over. You know that on an average road you would be able to drive 10 mph over the speed limit, but because you’re unsure about the actual value where you are you will likely drive more slowly than you normally would. Thus you take more precaution when there is a random “error” in setting xn. Now suppose you know you have to drive exactly the speed limit to avoid being pulled over, and if you speed a ticket is $100. If the cost of driving the speed limit is less than $100 (the benefit of speeding is less than $100), say $75, then you won’t speed. However you also wouldn’t speed if the ticket were $80, or if it were $800. Thus, since damages are never paid if you take precaution, and since there is some discontinuity in the private cost function, there is some range of efficient damages for negligence rules. 3. Legal Process 1 Much of the discussion in the legal process section of class has to do with avoiding trials. Trials themselves are a social cost: some money may be transferred from one party to another, but it would certainly be more efficient if the same money were transferred without ever having to go to trial. Therefore we may be concerned with pre-trial bargaining. 2 Docsity.com
