Tortious Law and Econ – An Automobile Accident Example

Tort comes from a French word that means injury. Tortious law from an economical point of view covers situations when the transaction cost of bargaining is too high for both parties to agree in advance.
What do I mean by agree in advance? Two economists, Robert Cooter and Thomas Ulen state tort law is; “the attempt to make injurers internalize the externalities they cause, in situations where transaction costs are too high to do this through property or contract rights.” So, let’s think about this with an example, say an automobile accident. Under contract law, you and a person would make a contract saying that the person cannot hit you. However, it would be impossible to have an agreement or promise before an accident that states what will happen in the event of an accident that both parties agree to. Even more impossible would be to have a contract with every other possible driver.

When we bring economics into the realm of law, we focus on efficiency. Efficiency in Tort law deals with whether an accident happens or not, which means that it focuses on all of the decisions/actions that lead up to the accident. Everything that happens after an accident such as, the injury, litigation, and how the law affects these only matters for distribution. Let’s go back to the car crash example. Bob and Larry are driving. Bob hits Larry with his car, doing $10,000 worth of damage. The question on everyone’s mind is: should Bob have to pay Larry damages? When we look at this, for terms of efficiency it does not matter who pays the damages. The accident has already occurred which means that $10,000 has been created. Sure, Bob is better off not having to pay and Larry is better off if Bob has to pay, regardless no new value is either created or destroyed. Don’t believe me? Check the table below.

Bob Owes Nothing

Bob Owes $10,000

Bob Owes $30,000

Larry’s Payoff

-$10,000

0

$20,000

Bob’s Payoff

0

-$10,000

-$30,000

Combined Payoffs

-$10,000

-$10,000

-$10,000

The goal of the laws behind automobiles such as speed limits and no talking on a cell phone, surprisingly, is not to eliminate accidents. Rather it is to limit accidents to the “efficient” number of accidents by implementing the correct incentives. We could eliminate auto accidents by making it illegal to drive cars, but this wouldn’t be efficient. Alternatively, we could eliminate almost all auto accidents by punishing those liable for the accident with death, but think of what would happen in this case… Most people would choose not to drive, and those who did would travel at 10 mph with at least 15 ft. between them and the car in front of them. So instead of eliminating accidents the law is structured to limit accidents to an efficient number.