Скачать презентацию Econ 522 Economics of Law Dan Quint Spring Скачать презентацию Econ 522 Economics of Law Dan Quint Spring

d1c99d28f29c2febc79247dae07e5b2a.ppt

  • Количество слайдов: 68

Econ 522 Economics of Law Dan Quint Spring 2012 Lecture 16 Econ 522 Economics of Law Dan Quint Spring 2012 Lecture 16

Logistics… w Second midterm next Monday In Birge Hall 145 (same room as first Logistics… w Second midterm next Monday In Birge Hall 145 (same room as first one) w Cumulative, covers all material up to end of contract law w More emphasis on newer material w w No lecture next Wednesday 1

Last week… w Motivation for tort law w Create incentive to avoid behaviors that Last week… w Motivation for tort law w Create incentive to avoid behaviors that lead to accidents w Elements of a tort w Harm; causation; breach of duty (negligence) w Strict liability rule: need to prove harm and causation w Negligence rule: need to prove all three elements 2

Precaution 3 Precaution 3

Precaution w The more carefully I drive, the less likely I am to hit Precaution w The more carefully I drive, the less likely I am to hit you But, driving more carefully is also more costly to me w Must be some efficient level of care w w Similarly… Construction company can reduce accidents with better safety equipment, better training, working shorter days, all of which cost money w Manufacturer can reduce accidents by designing/inspecting products more carefully – again, more expensive w 4

Actions by both injurer and victim impact number of accidents • speed like hell Actions by both injurer and victim impact number of accidents • speed like hell • drive slowly • drive drunk while texting • drive carefully • cheap, hasty manufacturing • careful quality control • save money • install smoke detectors, other safety equipment • wear helmet and use light • bicycle at night wearing black LESS EFFORT TO PREVENT ACCIDENTS “LESS PRECAUTION” GREATER EFFORT TO PREVENT ACCIDENTS “MORE PRECAUTION” 5

We will call these things precaution w Precaution: anything either injurer or victim could We will call these things precaution w Precaution: anything either injurer or victim could do to reduce likelihood of an accident (or damage done) w The next two questions should be obvious… w How much precaution do we want? w What is efficient level of precaution? w How do we design the law to get it? 6

To answer these questions, we’ll introduce a very simple model of accidents w Car To answer these questions, we’ll introduce a very simple model of accidents w Car hits a bicycle In real life: driver probably has insurance w In real life: some damage to bicycle, some damage to driver’s car w In real life: driver and bicyclist may not even know what the law is w w We’ll simplify things a lot, by assuming… Only one party is harmed w Parties know the law, don’t have insurance (for now) w We’ll focus on one party’s precaution at a time w 7

Simple economic model for thinking about tort law 8 Simple economic model for thinking about tort law 8

Model of unilateral harm x w p(x) A level of precaution marginal cost of Model of unilateral harm x w p(x) A level of precaution marginal cost of precaution probability of an accident cost of an accident w Unilateral harm – just one victim w Precaution – costly actions that make accident less likely Could be taken by either victim or injurer w We’ll consider both, but one at a time w w Notation x – the amount of precaution that is taken w w – the cost of each “unit” of precaution w w p(x) – probability of an accident, given precaution x w so total cost of precaution is wx p is decreasing in x A – cost of accident (to victim) so expected cost of accidents is p(x) A 9

Model of unilateral harm x w p(x) A level of precaution marginal cost of Model of unilateral harm x w p(x) A level of precaution marginal cost of precaution probability of an accident cost of an accident efficient precaution: minx { wx + p(x) A } $ w + p’(x) A marginal social cost of precaution w marginal social benefit of precaution = 0 = – p’(x) A wx + p(x) A (Total Social Cost) wx (Cost of Precaution) p(x) A (Cost of Accidents) x* (Efficient Level of Precaution) x < x* x > x* Precaution (x) 10

Effect of liability rules on precaution w We know what’s efficient w Level of Effect of liability rules on precaution w We know what’s efficient w Level of precaution that minimizes total social cost = wx + p(x) A w We’ll consider what happens if there is… no liability rule in place w a strict liability rule w a negligence rule w 11

Benchmark: what happens without any liability rule? 12 Benchmark: what happens without any liability rule? 12

Benchmark: No Liability w In a world with no liability… w w w Injurer Benchmark: No Liability w In a world with no liability… w w w Injurer does not have to pay for accidents So, bears cost of any precautions he takes, but does not receive any benefit Injurer has no incentive to take precaution Victim bears cost of any accidents, plus cost of precaution he takes (Victim precaution imposes no externality on injurer) Victim precaution will be efficient 13

Benchmark: No Liability $ w Injurer’s private cost is just wx w Private cost Benchmark: No Liability $ w Injurer’s private cost is just wx w Private cost to injurer Private cost to victim Minimized at x = 0 w Victim’s private cost is p(x) A + wx w wx + p(x) A wx Minimized at efficient precaution level x = x* p(x) A x* x w So rule of no liability leads to efficient precaution by victims, no precaution by injurers 14

Benchmark: No Liability Injurer Precaution No Liability Victim Precaution Zero Efficient 15 Benchmark: No Liability Injurer Precaution No Liability Victim Precaution Zero Efficient 15

Precaution isn’t the only thing that determines number of accidents w Precaution – actions Precaution isn’t the only thing that determines number of accidents w Precaution – actions which make an activity less dangerous Driving carefully w Wearing bright-colored clothing while bicycling w w The amount we do each activity also affects the number of accidents I decide how much to drive w You decide how much to bicycle w w Liability rules create incentives for activity levels as well as precaution 16

With no liability rule… w With no liability, I’m not responsible if I hit With no liability rule… w With no liability, I’m not responsible if I hit you w w w I don’t consider cost of accidents when deciding how fast to drive… …and I also don’t consider cost of accidents when deciding how much to drive So I drive too recklessly, and I drive too much (or: if there is no liability, social cost of driving includes cost of accidents, but private cost to me does not; driving imposes negative externality, so I do it too much) w So with no liability, injurer’s activity level is inefficiently high 17

What about victims? w With no liability, victim bears full cost of accidents Greater What about victims? w With no liability, victim bears full cost of accidents Greater activity by victim (more bike-riding) leads to more accidents w Victim weighs cost of accidents when deciding how carefully to ride, and when deciding how much to ride w (Private cost = social cost) w Victim takes efficient level of precaution, and efficient level of activity w w A rule of no liability leads to an inefficiently high level of injurer activity, but the efficient level of victim activity 18

Benchmark: No Liability Injurer Precaution No Liability Victim Precaution Injurer Activity Victim Activity Zero Benchmark: No Liability Injurer Precaution No Liability Victim Precaution Injurer Activity Victim Activity Zero Efficient Too High Efficient 19

Next: what happens under a strict liability rule? 20 Next: what happens under a strict liability rule? 20

Strict Liability w Perfect compensation: damages D = A w Under strict liability… Injurer Strict Liability w Perfect compensation: damages D = A w Under strict liability… Injurer pays damages for any accidents he causes w So injurer bears cost of accidents, plus his own precaution w Injurer internalizes externality his actions cause chooses efficiently w Victim is fully insured, no incentive for precaution w 21

Strict Liability $ w (Damages = A) w Injurer’s private cost is p(x) A Strict Liability $ w (Damages = A) w Injurer’s private cost is p(x) A + wx w Private cost to injurer Private cost to victim Minimized at efficient precaution level x = x* wx + p(x) A w Victim’s private cost is just wx w Minimized at x = 0 wx p(x) A x* x w So rule of strict liability leads to efficient precaution by injurers, no precaution by victims 22

Strict Liability Injurer Precaution No Liability Strict Liability Victim Precaution Injurer Activity Victim Activity Strict Liability Injurer Precaution No Liability Strict Liability Victim Precaution Injurer Activity Victim Activity Zero Efficient Too High Efficient Zero 23

What about activity level? w Under strict liability, injurer internalizes cost of accidents Weighs What about activity level? w Under strict liability, injurer internalizes cost of accidents Weighs benefit from driving against cost of accidents w Takes efficient activity level w w Under strict liability, victim does not bear cost of accidents Ignores cost of accidents when deciding how much to bike w Sets inefficiently high activity level w w A rule of strict liability leads to the efficiently level of injurer activity, but an inefficiently high level of victim activity 24

Strict Liability Injurer Precaution No Liability Strict Liability Victim Precaution Injurer Activity Victim Activity Strict Liability Injurer Precaution No Liability Strict Liability Victim Precaution Injurer Activity Victim Activity Zero Efficient Too High Efficient Zero Efficient Too High 25

So… w For both precaution and activity level… w “No liability” leads to inefficient So… w For both precaution and activity level… w “No liability” leads to inefficient behavior by injurer, efficient behavior by victim w “Strict liability” leads to efficient behavior by injurer, inefficient behavior by victim w Reminiscent of paradox of compensation One rule sets multiple incentives… w …can’t get them all right w But in tort law, we have a trick… w 26

Negligence 27 Negligence 27

Negligence Rule w Negligence rule: injurer is liable if he breached the duty of Negligence Rule w Negligence rule: injurer is liable if he breached the duty of due care w Within our model: Legal standard of care xn w Injurer owes damages if precaution level was below that level w x < xn D = A w x ³ xn D = 0 w w So on our graph from before, private cost to injurer is… wx + p(x) A w wx w for x < xn for x ³ xn w Best shot at achieving efficiency is to set xn = x* 28

“Simple Negligence”: Injurer precaution $ Private cost to injurer wx + p(x) A wx “Simple Negligence”: Injurer precaution $ Private cost to injurer wx + p(x) A wx p(x) A xn = x* x w Private cost is wx + p(x) A if x < xn, only wx otherwise w If standard of care is set efficiently (xn = x*), injurer minimizes private cost by taking efficient precaution 29

“Simple Negligence”: Victim precaution w What about victim? w We just said, injurer will “Simple Negligence”: Victim precaution w What about victim? w We just said, injurer will take efficient precaution w Which means injurer will not be liable w So victim bears costs of any accidents w (Victim bears residual risk) w So victim’s private cost is wx + p(x) A w Victim minimizes private cost by taking efficient level of precaution too! $ Private cost to victim (assuming injurer takes efficient level of precaution and is therefore not liable for damages) wx + p(x) A wx p(x) A x* 30

Simple Negligence Injurer Precaution Victim Precaution Injurer Activity Victim Activity Zero Efficient Too High Simple Negligence Injurer Precaution Victim Precaution Injurer Activity Victim Activity Zero Efficient Too High Efficient Strict Liability Efficient Zero Efficient Too High Simple Negligence, xn = x* Efficient No Liability 31

Other negligence rules w Rule we just saw is called “simple negligence” w Only Other negligence rules w Rule we just saw is called “simple negligence” w Only consider injurer’s actions in determining liability w But we could also consider whether victim was negligence in deciding whether injurer is liable “Negligence with a defense of contributory negligence” – injurer owes nothing if victim was also negligent w “Comparative negligence” – if both were negligent, share cost w “Strict liability with defense of contributory negligence” – injurer is liable (even if he wasn’t negligence), unless victim was negligent w w Any of these rules (with efficient standard of care) will lead to efficient precaution by both parties! 32

Discrete example of bilateral precaution A w p $1, 000 $20 for either party Discrete example of bilateral precaution A w p $1, 000 $20 for either party 10% / 6% / 2% w No “levels” of precaution – each party can either take precaution or not w Each accident causes $1, 000 of harm w Precaution costs $20 for each party w Chance of an accident is 10% if nobody takes precaution w 6% if one party takes precaution w 2% if both parties take precaution w w Note that precaution is efficient for both parties w Costs $20; reduces expected accidents by 4% X $1, 000 = $40 33

Different negligence rules A w p $1, 000 $20 for either party 10% / Different negligence rules A w p $1, 000 $20 for either party 10% / 6% / 2% Does injurer owe victim damages when… Neither party negligent? Only victim negligent? Only injurer negligent? Both parties negligent? Simple Negligence No No Yes Negligence with Defense of Contributory Negligence No No Yes No 34

Negligence with a Defense of Contributory Negligence A w p $1, 000 $20 for Negligence with a Defense of Contributory Negligence A w p $1, 000 $20 for either party 10% / 6% / 2% w If injurer is not taking precaution, victim wants to avoid liability w If injurer is taking precaution, victim bears residual risk, wants to minimize accidents Injurer victim pays for w Injurer is liable if he failed to take precaution… precaution, and any accidents that happen w Unless victim did too injurer pays for Victim precaution, not liable w Precaution is always for accidents Precaution None best-response for victim Precaution -20, -40 -20, -60 None -60, -20 0, -100 w For injurer, precaution is the best-response to precaution w “Both take precaution” is the only Nash equilibrium w And, is the efficient outcome 35

Different negligence rules A w p $1, 000 $20 for either party 10% / Different negligence rules A w p $1, 000 $20 for either party 10% / 6% / 2% Does injurer owe victim damages when… Neither party negligent? Only victim negligent? Only injurer negligent? Both parties negligent? Simple Negligence No No Yes Negligence with Defense of Contributory Negligence No No Yes No Comparative Negligence No No Yes Partial 36

A w p Comparative Negligence $1, 000 $20 for either party 10% / 6% A w p Comparative Negligence $1, 000 $20 for either party 10% / 6% / 2% w If both parties were negligent… w …divide cost proportionally Precaution Injurer w Precaution is again a dominant strategy for victim Victim w Now it’s a dominant strategy for injurer too None Precaution -20, -40 -20, -60 None -60, -20 -50, -50 w Again, “both take precaution” is the only equilibrium w (And the efficient outcome) 37

Different negligence rules A w p $1, 000 $20 for either party 10% / Different negligence rules A w p $1, 000 $20 for either party 10% / 6% / 2% Does injurer owe victim damages when… Neither party negligent? Only victim negligent? Only injurer negligent? Both parties negligent? Simple Negligence No No Yes Negligence with Defense of Contributory Negligence No No Yes No Comparative Negligence No No Yes Partial Strict Liability with Defense of Contributory Negligence Yes No 38

Strict Liability with a Defense of Contributory Negligence w Now, injurer is liable, regardless Strict Liability with a Defense of Contributory Negligence w Now, injurer is liable, regardless of whether he took precaution… $1, 000 $20 for either party 10% / 6% / 2% Victim Precaution Injurer w …unless victim was negligent A w p None Precaution -40, -20, -60 None -60, -20 0, -100 w Once again, “both take precaution” is the only equilibrium 39

Negligence Injurer Precaution Victim Precaution Injurer Activity Victim Activity Zero Efficient Too High Efficient Negligence Injurer Precaution Victim Precaution Injurer Activity Victim Activity Zero Efficient Too High Efficient Strict Liability Efficient Zero Efficient Too High Simple Negligence Efficient Negligence with a Defense of Contributory Negligence Efficient Comparative Negligence Efficient Strict Liability with Defense of Contributory Negligence Efficient No Liability assuming all relevant standards of care set to the efficient levels 40

(Aside: with bilateral precaution, things occasionally get more complicated…) w Redundant precaution – either (Aside: with bilateral precaution, things occasionally get more complicated…) w Redundant precaution – either party could take precaution, efficiency only requires one of them w If precaution is continuous, any negligence rule still leads to efficient precaution level by both w When precaution is discontinuous, not always Driver can fasten seatbelt, or car company can design seatbelt that buckles itself (more costly) w Simple negligence: car company might be liable if designed manual seatbelt and driver didn’t use it, so car company might design automatic belt w Negligence with defense of contributory negligence: car company escapes liability, so designs manual belt, rational driver uses it w w But as long as precaution is continuous, no problem 41

What about activity levels under a negligence rule? w Simple negligence: injurer is only What about activity levels under a negligence rule? w Simple negligence: injurer is only liable if he was negligent w Leads injurer to take efficient precaution, so injurer expects to not be liable for any accidents that do occur w So injurer ignores cost of accidents when deciding on activity level (how much to drive) w Injurer drives carefully, but still drives too much w Victim bears “residual risk” w Victim bikes carefully, and bikes efficient amount 42

Adding activity levels to our results on precaution… Injurer Precaution Victim Precaution Injurer Activity Adding activity levels to our results on precaution… Injurer Precaution Victim Precaution Injurer Activity Victim Activity Zero Efficient Too High Efficient Strict Liability Efficient Zero Efficient Too High Simple Negligence Efficient Too High Efficient Negligence with a Defense of Contributory Negligence Efficient Comparative Negligence Efficient Strict Liability with Defense of Contributory Negligence Efficient No Liability 43

Negligence with Defense of Contributory Negligence, and Comparative Negligence w Either rule: efficient precaution Negligence with Defense of Contributory Negligence, and Comparative Negligence w Either rule: efficient precaution by both parties w Either rule: if neither party was negligent, injurer does not owe damages w So victim is residual risk bearer (pays for accidents) w So victim weighs cost of accidents against benefits of activity, takes efficient activity level w Injurer ignores cost of accidents, takes inefficiently high activity level 44

Negligence Injurer Precaution Victim Precaution Injurer Activity Victim Activity Zero Efficient Too High Efficient Negligence Injurer Precaution Victim Precaution Injurer Activity Victim Activity Zero Efficient Too High Efficient Strict Liability Efficient Zero Efficient Too High Simple Negligence Efficient Too High Efficient Negligence with a Defense of Contributory Negligence Efficient Too High Efficient Comparative Negligence Efficient Too High Efficient Strict Liability with Defense of Contributory Negligence Efficient No Liability 45

Strict Liability with Defense of Contributory Negligence w If victim is not negligent, injurer Strict Liability with Defense of Contributory Negligence w If victim is not negligent, injurer is liable w Leads to efficient precaution by both, so injurer is liable w Injurer is residual risk bearer w Injurer weighs cost of accidents against benefits of activity, takes efficient activity level w Victim ignores cost of accidents, takes inefficient high activity level 46

Negligence Injurer Precaution Victim Precaution Injurer Activity Victim Activity Zero Efficient Too High Efficient Negligence Injurer Precaution Victim Precaution Injurer Activity Victim Activity Zero Efficient Too High Efficient Strict Liability Efficient Zero Efficient Too High Simple Negligence Efficient Too High Efficient Negligence with a Defense of Contributory Negligence Efficient Too High Efficient Comparative Negligence Efficient Too High Efficient Strict Liability with Defense of Contributory Negligence Efficient Too High No Liability 47

An easier (perhaps) way to understand all of this take precaution only to AVOID An easier (perhaps) way to understand all of this take precaution only to AVOID liability precaution is efficient, but activity level is too high Injurer Precaution Victim Precaution Injurer Activity Victim Activity Zero Efficient Too High Efficient Strict Liability Efficient Zero Efficient Too High Simple Negligence Efficient Too High Efficient Negligence with a Defense of Contributory Negligence Efficient Too High Efficient Comparative Negligence Efficient Too High Efficient Strict Liability with Defense of Contributory Negligence Efficient Too High No Liability 48

An easier (perhaps) way to understand all of this precaution and activity level are An easier (perhaps) way to understand all of this precaution and activity level are both efficient to reduce accidents, since he bears their cost Injurer Precaution Victim Precaution Injurer Activity Victim Activity Zero Efficient Too High Efficient Strict Liability Efficient Zero Efficient Too High Simple Negligence Efficient Too High Efficient Negligence with a Defense of Contributory Negligence Efficient Too High Efficient Comparative Negligence Efficient Too High Efficient Strict Liability with Defense of Contributory Negligence Efficient Too High No Liability 49

With each negligence rule… w One party can avoid liability by taking efficient precaution With each negligence rule… w One party can avoid liability by taking efficient precaution Leads to efficient precaution w But inefficient activity level w w Other party is the residual risk bearer – even when he takes precaution, he is still liable Leads to efficient precaution w And also efficient activity level w w Who should bear residual risk? w One way to answer is to ask whose activity level has greater impact on efficiency 50

So which rule is best? w “Put the incentive where it does the most So which rule is best? w “Put the incentive where it does the most good” Efficient rule depends on which choices have greatest impact w If only injurer’s choices (precaution + activity) matter strict liability is better rule w If bilateral precaution negligence w Which negligence rule – depends whose activity level is more important w w Friedman (citing Posner): this is why very dangerous activities often covered by strict liability Blasting with dynamite, keeping a lion as a pet w Even with proper precaution, still very dangerous, so injurer activity level is important 51 w

Friedman: activity is just unobservable precaution w Activity is just another type of precaution, Friedman: activity is just unobservable precaution w Activity is just another type of precaution, but type where court can’t determine efficient level Court can tell inefficient for me to drive at night with headlights off w Can’t tell how many miles it’s efficient for me to drive w w Determination of negligence can only be based on observable precaution, not unobservable Negligence rule leads to efficient levels of observable precaution by both parties w Simple negligence leads only to efficient observable precaution by injurer, but efficient precaution by victim as well w Strict liability leads to efficient observable and unobservable precaution by injurer, but no precaution by victim 52 w

What if injurer is a business? (won’t get to this Monday) 53 What if injurer is a business? (won’t get to this Monday) 53

Steven Shavell, Strict Liability Versus Negligence w Focuses on injurer precaution and activity w Steven Shavell, Strict Liability Versus Negligence w Focuses on injurer precaution and activity w Compares strict liability to negligence rules w Accidents between strangers (what we’ve been doing): “Under a negligence rule, all that an injurer has to do to avoid the possibility of liability is to make sure to exercise due care if he engages in his activity. w Consequently he will not be motivated to consider the effect on accident losses of his choice of whether to engage in his activity or, more generally, of the level at which to engage in his activity; he will choose his level of activity in accordance only with the personal benefits so derived. w But surely an increase in his level of activity will typically raise expected accident losses. Thus he will be led to choose too high a level of activity. ” w 54

Steven Shavell, Strict Liability Versus Negligence w Whereas under strictly liability… “Because an injurer Steven Shavell, Strict Liability Versus Negligence w Whereas under strictly liability… “Because an injurer must pay for losses whenever he in involved in an accident, he will be induced to consider the effect on accident losses of both his level of care and his level of activity. w His decisions will therefore be efficient. w Because drivers will be liable for losses sustained by pedestrians, they will decide not only to exercise due care in driving but also to drive only when the utility gained from it outweights expected liability payments to pedestrians. ” w w (This is exactly what we had already concluded…) 55

Steven Shavell, Strict Liability Versus Negligence Injurer Precaution Injurer Activity Simple Negligence Efficient Too Steven Shavell, Strict Liability Versus Negligence Injurer Precaution Injurer Activity Simple Negligence Efficient Too High Strict Liability Efficient ACCIDENTS BETWEEN STRANGERS 56

Next case: accidents between “sellers and strangers” w Injurer is in a competitive business, Next case: accidents between “sellers and strangers” w Injurer is in a competitive business, but not with victim w victim is not injurer’s customer, but a stranger w Example: taxi drivers provide service to their passengers w risk hitting other pedestrians w victims are not their own customers w Shavell assumes perfect competition Price = marginal cost of “production” w Sales = number of passengers who demand rides at that price w 57

Accidents between businesses and strangers w Strict liability Taxi drivers pay for accidents, set Accidents between businesses and strangers w Strict liability Taxi drivers pay for accidents, set x = x* to minimize private cost w Perfect competition cost of remaining accidents is built into price w Taxi passengers face price that includes cost of accidents w Passengers internalize risk of accidents, demand efficient number of rides w w Negligence rule Taxi drivers still take efficient precaution, to avoid liability w But since drivers don’t bear residual risk, cost of accidents not built into price w Passengers face prices that are too low (lower than social cost of a taxi ride) w Demand for taxi rides inefficiently high w 58

Steven Shavell, Strict Liability Versus Negligence Injurer Precaution Injurer Activity Simple Negligence Efficient Too Steven Shavell, Strict Liability Versus Negligence Injurer Precaution Injurer Activity Simple Negligence Efficient Too High Strict Liability Efficient ACCIDENTS BETWEEN STRANGERS ACCIDENTS BETWEEN BUSINESSES AND STRANGERS 59

Final case: accidents between businesses and their own customers w Example: restaurants taking precaution Final case: accidents between businesses and their own customers w Example: restaurants taking precaution to reduce risk of food poisoning w How accurately do customers perceive risks? 1. Customers can accurately judge risk of each restaurant w 2. Customers can accurately judge average level of risk, but not differences across restaurants w 3. Customers ignorant of risks w 60

Accidents between businesses and their own customers: strict liability w Seller bears cost of Accidents between businesses and their own customers: strict liability w Seller bears cost of accidents efficient precaution w Seller bears residual risk expected cost of accidents is built into prices w Even if customers don’t perceive risk, price leads them to make efficient choices Price of shellfish = cost of shellfish + expected cost of food poisoning w Even if I don’t know that, I buy shellfish when benefit > price, so I’m forced to choose efficiently w 61

Accidents between businesses and their own customers Risk Perception? Strict Liability Seller Precaution Buyer Accidents between businesses and their own customers Risk Perception? Strict Liability Seller Precaution Buyer Activity Yes Efficient No Efficient 62

Accidents between businesses and their own customers: negligence w Restaurants take efficient precaution, to Accidents between businesses and their own customers: negligence w Restaurants take efficient precaution, to avoid liability w But since they avoid liability, cost of accidents not built into prices w If customers perceive risk correctly, no problem Weigh benefit of meal versus price + expected pain due to food poisoning w Demand efficient number of meals w w But if customers don’t perceive risk, they’ll demand inefficiently many dangerous meals 63

Accidents between businesses and their own customers Risk Perception? Negligence Buyer Activity Yes Efficient Accidents between businesses and their own customers Risk Perception? Negligence Buyer Activity Yes Efficient No Strict Liability Seller Precaution Efficient Yes Efficient No Efficient Too High 64

Accidents between businesses and their own customers: no liability w If customers correctly judge Accidents between businesses and their own customers: no liability w If customers correctly judge risks… Restaurants take efficient precaution to attract customers w And customers demand efficient number of meals w w If customers can only judge average level of risk… Restaurants take no precautions w But customers know this, demand efficient (low) number of meals w w If customers are oblivious to risk… Restaurants take no precautions w Cost of food poisoning not built into prices w Customers demand inefficiently high number of meals w 65

Accidents between businesses and their own customers Risk Perception? No Liability Yes Efficient Yes Accidents between businesses and their own customers Risk Perception? No Liability Yes Efficient Yes Efficient No Negligence Buyer Activity No Strict Liability Seller Precaution Efficient Too High Yes Efficient Average None Efficient No None Too High 66

Next few lectures… w How do we determine legal standard for negligence? w What Next few lectures… w How do we determine legal standard for negligence? w What happens if we get it wrong? w What happens when the world is more complicated than we’ve been imagining so far? 67