The theory of economics of Torts sets two parameters on measuring probability of harm

being caused and denote it with p, and we include a function of p which will make it
decrease with its increase, x. This x is the precaution taken. Finally, we take A as the cost of
the harm. And p.A as the probability of the harm in money. We assume that the cost of
taking precaution is w per unit of precaution. Hence, total cost of precaution would be wx.
Now, we derive Social Cost by adding the cost of precaution to the probability of harm.

[ENTER GRAPH]

Consequently, we have:     
 SC= wx+p(x).A                      ……..(1)

We see by the above relation that an increase in precaution reduces the harm’s value.
Hence, the marginal increase in precaution gives out marginal benefits in terms of harm
reduction. And we come to the equation,
w=-p’.A       ……..(2)

This is basically the derivative of (1). 

Now, negligence rule is based on the assumption that precaution equals the legal standard
(x’=x*). Now, we can work on how policymakers can evaluate liability and set legal
standards accordingly. In the case of,  United States v. Carroll Towing Co, Hand, J developed
the Hand’s Rule. He took three parameters to judge the same. 
1. Probability of harm (P)
2. The resultant harm (B)
3. The liability which arises (L)

Putting it mathematically, the rule roughly states that if P>B.L then liability can be affixed.
Assuming the values to be marginal, we can substitute the notations and get,
w<-p’.A          ….…(3)
If the precaution falls short of legal standard then the person is liable. The injurer has to
increase their precaution to make it equal to the legal standard.
w=-p(x*).A      .…..(4)

To put it simply, if there is scope for increase in precaution then the injurer is liable. So, the
court on a case-by-case basis can come to a legal standard by following the maxima of the
function where the derivative is the highest. And if an accurate empirical collection of data
can be acquired then the legal standard can be calculated on the basis of the efficient cost
of precaution. Another way of affixing legal standards can be on the basis of community
standards. This method follows a customary precaution that has been taken by people in a
given sphere of tort and enforce that as the standard.