Yonsei University
1. Tort Law: Introduction
International Summer School
Law and Economics
Lecture 7
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• A tort is a legal wrong.
– from the Latin word tortus which meant
wrong.
• Tort refers to that body of the law which
will allow an injured person to obtain
compensation from the person who
caused the injury.
– Accident law
An Economic Theory of Tort Law
• People often harm each other by doing
something wrong.
– automobile accidents,
– punching someone at bar,
– a birth-control device causes infertility
• Suppose that the victim in each of these
cases initiates a law suit. Under what
body of law can the victim sue?
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 Tort law Tort law
• For some kind of harm, the costs of bargaining are so
• The victim cannot sue under contract law, high that the parties cannot cooperate together.
nor under property law. 1) Difficulty of identifying bargaining partners or too
• We need for a third body of private law many potential partners:
ex) driver vs. drivers, or driver vs. pedestrians
other than property and contracts. The
third body of law concerns compensable 2) Unlikely events: hunting accidents
wrongs that do not arise from breach of Emotion: punching one's nose
contract and cannot be remedied by an Asymmetric information and strategic decision:
injunction against future interference -- tort fuel additives
law.
* Tort law concerns relationships among people for when
transaction costs of private agreement are relatively
high.

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Economic Essence of Tort Law 2. Tort liability rule

• Harms that are outside private agreements • Accident happens and when it does its victims incur
costs. Those costs can remain the burden of victims or
are described as externalities. they can be shifted to others (e.g., the injurer).

• Tort law is one of the institutions political communities

• The economic essence of tort law is its develop in order to allow victims the opportunity to shift
the costs that befall them to others. Insurance is another
use of liability to internalize externalities such institution.
created by high transaction costs.
• The conditions for shifting losses from victim-plaintiffs to
injurer-defendants are expressed in ‘liability rules’. Two
cf. criminal statues, safety regulations and basic kinds of tort liability rules are ‘fault-based’ liability
rule and ‘strict’ liability rule.
tax incentives.

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Tort liability rule

• Compensation
• Deterrence
– precaution to lower expected harm from the accident.

• Timing
-------l--------------------l-------------------l----
Precaution (care) Accident Dispute

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 Traditional Theory of Tort Liability Tort liability rule
• Three elements of a tort
– Wrong: breach of a duty of care
• Three elements must be present for recovery by
– Causation
the plaintiff under the traditional theory of torts: – Harm
1. the plaintiff must have suffered harm;
2. the defendant's act or failure to act must • Fault-based liability
cause the harm; and – Negligence rule
3. the defendant's act or failure to act must
• Strict liability
constitute the breach of a duty owed to the
– Dangerous activities, product liability
plaintiff by the defendant.

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Tort liability rule 3. Economic model of tort liability

• Strict liability • Assume
– An injurer must always pay for harm due to an – Victims and injurers are risk neutral.
accident that he causes.
– They are strangers to each other.

• Negligence rule – Unilateral precaution case

– An injurer must pay harm caused only when • Only injurers can influence risks.
he is found negligent, that is, only when his
level of care was less than a standard of care – Bilateral precaution case
chosen by the courts.

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Economic model of tort liability

• x injurer’s precaution level
• w unit cost of precaution
• p(x) probability of an accident
– decreasing and convex

• h harm that the accident causes

• x* minimizes SC = p(x)h + wx
– FOC: - p’(x*)h = w

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 Unilateral precaution case Strict liability vs. Negligence
• (x*) minimizes SC = p(x)h + wx • Strict liability
– Injurers fully internalize external costs
Let d denote damages payment. – Injurers are induced to take efficient care.

• Negligence rule (with x^)

• Injurer (x) minimizes CI(x) = p(x,y)d + wx
– Note that when d = h, the injurer would
choose x* to minimize his own expected cost.
– Assume the legal standard of care, x^, is set
at x*.
– Injurers are induced to take efficient care.

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Example

In terms of our model,

p(x) = 0.15 when x = 0 (None)
= 0.1 when x = 1 (Moderate)
= 0.08 when x = 2 (High)
Negligence rule with efficient standard of care
w = 3,
h = 100

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1) Efficient outcome: Moderate (x* = 1)

2) Equilibrium outcome

a) Strict liability (assume d = h, full compensation)

The injurer has an incentive to choose ‘Moderate’ -- efficient

b) Negligence (assume x^ = x* = 1)
The injurer has an incentive to choose ‘Moderate’ – efficient

CI(x) = 15 when x = 0
=3 when x = 1
=6 when x = 2

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