Tort cost of the accidents and internalize the

Tort damages made to the victims usually consist of two
parts, which are compensatory damages and punitive damages. In this essay, the
tort damages under the situation where the victims are not liable would be
discussed. Theoretically, in economic models under the assumption that the
legal standard of precaution equals the efficient level, tort damages are
supposed to compensate the victims perfectly and give the incentive to
potential injurers to take the legal precaution so that the social cost is
minimized and economic efficiency can be achieved. When put into the real world
which is an extension of economic model, however, besides adopting the perfect compensatory
damages or Hand Rule damages, problems should also be considered when deciding
the level and condition of the damages such as amount and condition of punitive
damages, diversity of tort loss, failure of the economic assumptions and asymmetric
information.The purpose of tort law is to minimize the social costs of
accidents including precautions costs, accident losses and administration costs
which could be seen as a function of precaution. An efficient level of tort
damages should intend to render potential injurers to reconsider the expected
cost of the accidents and internalize the marginal costs and benefits of
precaution. Under the rational choices made by people, comparing the choices
between taking legal precaution and the perfectly compensatory tort damages,
they should be made better to take the legal standard of precaution under the
rule of strict liability or negligence. Since the potential injurers take the
legal standard of precaution and thus avoid the liability of accident, for
victims, it is the same situation as the rule of no liability which render them
to take the precaution, too. Failure of the determination of tort damages may
lead to a wrong expected cost of accidents, thus a precaution which is too high
or too low may occur, leading to an economic inefficiency. Therefore in
economic theory, the tort damage is supposed to induce people to take the
efficient precaution by making the liable injurers compensate perfectly to the
victims so that the social costs can be minimized.There are two concepts, or methods, to compute the
compensatory damages in tort law. One is the standard economic concept of
indifference which is intended to render the victim at exactly the same level
of utility as before the accident. For this kind of compensation, there is some
requirement of the tort loss of the victims. To utilize the concept of perfect
compensation which “is fundamental to an economic account of
incentives” properly, a ready market substitute of the loss is necessary. Given
an available substitute of loss, or have known the monetary prices of the goods
at which make victims indifferent to sell them, it is reasonable to give the
proper level of monetary compensation.In some situations, however, for the loss in the tortious
acts such as the death of a child to a family, it is impossible to find a
market substitute, therefore a perfect compensation, for the victims. As a
result, another method is taken to give a “reasonable” compensation
which is called Hand Rule Damages. Based on the fact that individuals always
face the trade-off between paying more precautions and a less probability of
engaging in an accident and under the assumption that individuals make rational
choices between the marginal costs and benefits of precaution, it is possible
to compute the monetary amount of the kind of loss which have no available market
substitute such as life. Illustrated by mathematical function, the monetary
value of loss

 (where X
denotes the precautions and probability of the accident is denoted by P).Therefore, using either the perfect compensatory damages or
the Hand Rule damages enable us to determine the level of tort damages properly
and induce people to take legal standard of precaution in an economic model
theoretically. Some more considerations, however, should be taken when put into
a “real world” context. As Gary (1994) mentioned in one of his
reviews, that although “tort law provides a significant amount of
deterrence, yet considerably less than the economists’ formulae tend to
predict”. When reviewing the data of tort damages from different
countries, maybe the first thing being noticed is the disparity of damages
caused by the same accident. Argued by Cooter and Ulen (2016), that damages
“cannot be different in similar countries for identical accidents and also
be optimal in each country” and also that “punitive damages are a
significant source of liability disparity”. As can be seen from above, there
is much uncertainty about how much and when the punitive damages can be awarded
and the only thing can be referred to is ambiguous guideline.In practice, both the compensatory and punitive damages
should be put into a context which is an extension of economic model where the
economic assumptions would be relaxed.The rationality of individuals and groups is one of the most
important assumptions in economic analysis while it is not the case in real
life. People sometimes act irrationally because of the asymmetry of information
and sometimes just for no reason. A misestimate of probability of accidents by
injuries may result in an error in determining the tort damages. For example,
there is usually a difference between the beforesight and hindsight estimates
of probability. The injuries are sometimes subject to the hindsight bias and
fail to take themselves back to the situation before the accidents happen and
think of the expected probability of the injurers at that time. So the
rationality of the amount and warranty of some punitive damages is doubtful. Also
because of the hindsight bias, the value of loss given by the Hand Rule Damages
is sometimes needed to be reconsidered for the uncertainty in the probability. Other
irrational behaviours of injuries include the anchoring effect which is usual
as well as in other courts. When the attorney of victims suggests considerable
large damages, the thinking of injuries may be framed in the suggestion and
thus decisions is possible to be influenced by the proposal which could be not
so reasonable and as a result, a huge punitive damage may appear. Moreover, in
some cases, even the ability of the attorneys of persuading the injuries that
the compensatory damages is much lower than the real loss can affect the
result, which should also be taken into consideration when determining the tort
damages.Besides the injuries, potential injurers and victims behave
not so rationally as the assumptions in the model, too. A drastic reduction of
compensatory damages may occur when only part of the victims brings suit and
recovers because others fail to prove the causation or harm. Although there are
guidelines in a few countries to regular the punitive damages in order to
compensate that difference, still a huge rage of flexibility exists especially
for the uncertainty of the “enforcement error”, namely the “ratio of
compensated victims to all victims” (Cooter and Ulten, 2016), is not clear. What’s
more, occasional acts of “clumsiness, inattention, misjudgement, misperception,
or weakness of will” which are called lapses would also make the decision of liability
and also punitive damages controversial (Cooter and Ulten, 2016).When determining the level of tort damages, the diversity of
different industries should be considered because of the different viability. Being
imposed on a huge tort damages, a company or group may have a possibility to go
bankrupt and eventually an economic inefficiency is caused. Not only the
economic viability, according to the empirical study of Gary (1994), but also
the effects of tort damages and liability rules vary among different
industries.Despite a number of realistic problems including those
above, when analyzing the empirical data from Gary’s review (1994) and
comparing the theoretical incentives and its real effects, it is found that in
most of the case, more or less the tort law has succeeded in deterring
potential injurer from doing injury on others, although the ratio “between tort
liability incentives” in theory “and resulting real world conduct” will not be
a one-to-one relationship. This could partly be explained by people’s reaction
to errors of injuries setting the level of tort damages. We could observe the
same direction of injurers’ precaution and the level of the error in
determining the tort damages under the strict liability. But under the negligence
rule, even when there is a modest range of error in setting an efficient level
of damages because of some realistic problems, it is proved that potential
injurers are still made better when choosing to take the legal standard of
precaution.

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As a conclusion, since every industry, even in every case,
has its own style and combination of realistic problems. It is impossible to
find a general solution to those problems in practice and it is recommended to
take a full consideration of these problems and make case-by-case design of
tort damages which are based on the basic theoretical intention which is to perfectly
compensate the victims and induce potential injurers to take the legal standard
precaution so that the economic efficiency could be achieved.

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