lecture 17 - Econ 522 Economics of Law Dan Quint Spring...

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Econ 522 Economics of Law Dan Quint Spring 2017 Lecture 17
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2 Third homework due tomorrow night Reminders
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3 How to create incentives to avoid accidental harms? Strict liability and negligence rules Harm, causation, breach of duty Two cases that illustrate ideas that came up: Monday, we began tort law
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4 Up to early 1900s, torts were limited to… “trespass to the person” – things like assault “trespass on the case” – particular situations in which a duty of care was owed, such as between a business and its customers Donoghue v Stevenson (1932, UK) Mrs. Donoghue’s friend ordered her an ice cream and ginger beer in a café in Renfrewshire Dead snail in the bottle made her ill Usual conditions for a tort didn’t apply, but court ruled for plaintiff “You must take reasonable care to avoid acts or omissions which you can reasonably foresee would be likely to injure your neighbour.” “Due care” is owed in a wide range of situations
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5 Vaughan v Menlove (1837, UK) Defendant built haystack near boundary of his land Was warned it was dangerous, but said “he would chance it” Haystack caught fire, fire spread to plaintiff’s land and burned down two cottages Judge advised jury: defendant “was bound to proceed with such reasonable caution as a prudent man would have exercised under such circumstances” Appeals court agreed: “we ought… to adhere to the rule which requires in all cases a regard to caution such as a man of ordinary prudence would observe” What would a “reasonable man” have done?
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6 unilateral harm (one “injurer”, one “victim”) reduce behavior to a one-dimensional choice for each, how careful to be (“precaution”) think about effect of liability rule on precaution and activity levels of both injurer and victim Also on Monday, we discussed a simple economic model
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7 Model of unilateral harm x level of precaution w marginal cost of precaution p(x) probability of an accident A cost of an accident Precaution (x) $ p(x) A (Cost of Accidents) wx (Cost of Precaution) wx + p(x) A (Total Social Cost) x* (Efficient Level of Precaution) efficient precaution: min x { wx + p(x) A }
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8 Injurer doesn’t perceive accidents as part of private cost No incentive to take any costly precaution No incentive to reduce activity, which will be above efficient level Victim bears cost of accidents as part of private cost Victim’s private cost = social cost Faces incentive to take efficient amount of precaution Faces incentive to reduce activity to efficient level A rule of no liability leads to… no injurer precaution and overly high injurer activity but efficient victim precaution and victim activity level Benchmark: what happens if injurer faces no liability at all?
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9 Benchmark: No Liability Efficient Too High Efficient Zero No Liability Victim Activity Injurer Activity Victim Precaution Injurer Precaution
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10 Injurer precaution Social cost: cost of precaution
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