Thinking and Deciding

500 RISK
Torts
A fourth mechanism is the tort system: lawsuits. When a person is injured because of
someone else’s risk-producing activity, the victim can sue the injurer. Such lawsuits
work much like pollution taxes. They give potential injurers an incentive to reduce
risks to others. The incentive is reduced risk of lawsuits. Being found liable sends
a message to those in the position of the injurer (including the injurer) to take care
because they will be held responsible for the consequences of their recklessness.
A variety of principles govern tort law, and these principles vary from region to
region. One common principle is ”negligence.” The injurer must pay only if the
injurer takes insufficient care. In a classic case in U.S. law, Judge Learned Hand
ruled that Carroll Towing Co. was liable for damages caused by one of its barges
breaking loose from its mooring and running into a ship. Hand argued that the owner
of the barge was negligent if the burden of precautions was less than the probability
of harm times the gravity of the injury, that is, the expected loss from not taking a
certain amount of care (Landes and Posner, 1987). In this case, the care at issue was
having an attendant on board the barge (which was not common practice at the time).
If such a precaution could be taken and lead to a total net saving, then the amount of
care being taken was less than the optimum. The net saving is the cost of the losses
prevented, minus the cost of the radios. Another standard, more rarely applied, is
“strict liability.” By this standard, the injurer pay for any damages, regardless of the
amount of care that was taken.
One issue that often arises in tort law is “who is responsible?” A recent example
is the litigation in the United States concerning the risk of cigarettes. The cigarette
makers claim that smokers are themselves responsible, so the companies should not
have to pay for the harm caused by their products. A simpler example is the case
of someone who falls off a ladder as a result of positioning the ladder upside down.
Should the company be required to put a “this end up” label on the ladder or to make
it impossible to put the ladder the wrong way?
From a normative economic point of view, this issue hinges on the question of
who can reduce the risk most efficiently, what Calabresi (1960) called the “least cost
avoider.” If the law makes the companies pay to reduce the risk, and if individuals
could reduce the risk more cheaply, then the payment is inefficient. The extra cost required
to avoid losing lawsuits will raise the price of the product, forcing consumers
to pay more or do without it. It would be better not to make the company pay. Of
course, the question of who is the least-cost avoider depends on what the next step
is. A warning label would be inexpensive. A device to make sure that ladders cannot
be used upside down might be more expensive and not worth the cost.
Compensation
Tort law has a second function which is compensation of victims. Compensation
and incentive are different functions. Compensation, in the form of money, provides
resources to those who can put them to good use to recover their way of life — for