Economics of Accidents and Learned Hand Formula of Liability for Negligence

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Economics of Accidents and Learned Hand Formula
of Liability for Negligence

• Torts are wrongs that subject the wrongdoer to a
  suit for damages by the victim
• Intentional and unintentional torts
• Unintentional torts injurer is liable under
  tort law to his victim in accidents
• Expected accident cost P L
• Ignore risk aversion, optimal precaution occurs
  when cost of taking precaution (B) lt expected
  benefit of taking precautions ( P L)

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• Optimal precaution will be achieved without legal
  intervention if person taking precaution is the
  same as person who may be injured
• Otherwise legal intervention may be necessary
• Legal intervention is not necessary if
  transactions costs are zero Coase Theorem
• If transactions costs are significant and legal
  system hold injurer liable for damages L then
  his expected legal judgment cost P L

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• Judge Learned Hand wrote that a potential injurer
  is negligent if but only if B lt P L the
  formula for optimal accident avoidance
• In the diagram, curve PL is the marginal change
  in expected accident costs as a function of care
  and curve B is marginal cost of care
• To the left of c the injurer is negligent
• To the right of c accidents are unavoidable in
  an economic sense. Why?

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• Unusually large losses LO means no negligence is
  implied because B gt P L would normally hold
  unless LO gtgt L
• Similarly if normally P is very low we will rule
  no negligence
• Likewise if normally B is very high we will again
  rule no negligence
• When applying the Hand formula average values are
  assumed by the court and negligence reflects
  individual variations from average values