ECO320 Test 2 Questions and Verified Answers/Accurate Solutions

ECO320 Test 2 Questions and Verified Answers/Accurate Solutions| Already Graded A+

Strict Liability Tort A civil wrong that occurs when a defendant takes an action that is
inherently dangerous and cannot ever be undertaken safely, no matter what precautions the
defendant takes. The defendant is liable for the plaintiff's damages without any requirement
that the plaintiff prove that the defendant was negligent.



Negligence Rule a rule of liability requiring the plaintiff to prove harm, causation, and fault;
defendant escapes liability if he satisfied the applicable standard of care to avoid the harm
caused; imposes a legal standard of care with which actors must comply in order to avoid
liability



Negligence careless neglect, often resulting in injury



When high transaction costs preclude private agreements --> tort liability can induce
injurers to internalize the costs that they impose on other people



Tort Liability The legal requirement that a person responsible, or at fault, shall pay for the
damages and injuries caused



Duty to Mitigate A duty placed on a party injured by breach, requiring that party to avoid
damages by making reasonable efforts.



Efficient Level of Precaution x* = level of precaution that minimizes the expected social
costs [E(SC)] of the accident; marginal social cost = marginal social benefit; level of precaution
that minimizes the costs of accidents & the costs of avoiding accidents



"Cost-Justified" when efficiency requires taking more precaution; if precaution is less than
the efficient amount (x<x*), then the marginal social cost of precaution < marginal social
benefit (w < [p'(x*)A])



Precaution any behavior reducing the probability or magnitude of an accident

,Incentives for Precaution in the Simple Model depend upon who can take precaution
against the accidents & how the law allocates the costs of harm; to create efficient incentives,
law should align the private benefits & costs of the actors with the social benefits & costs



Incentives for Precaution Under No Liability (Victim) the victim bears the expected harm
[p(xv)A]; total costs that the victim expects to bear equal the cost of precaution plus the
expected cost of harm -->
wv*xv + p(xv)A; victim chooses xv (has an incentive) to minimize the costs that they bear



Rule of No Liability (Victim) causes the victim to internalize the marginal costs & benefits of
precaution, which gives the victim incentives for efficient precaution



Incentives for Precaution Under Strict Liability (Victim) victim internalizes the costs of
precaution & externalizes the benefits (no incentive to take precaution); victim receives
damages (D) when an accident occurs; damages compensate the victim perfectly (D=A); with
strict liability & perfect compensation, the victim is indifferent between an accident with
compensation & no accident; victim gains no advantage from reducing the probability/severity
of accidents



Incentives for Precaution Under No Liability (Injurer) harm is suffered & bear by the victim --
> no incentive for injurer to take precaution



Rule of No Liability (Injurer) gives the injurer no incentive to take precaution; injurer is
indifferent between an accident & no accident; internalizes the costs of precaution &
externalizes the benefits



Incentives for Precaution Under Strict Liability (Injurer) causes the injurer to internalize the
marginal costs & benefits of precaution, which gives incentives for efficient precaution



Symmetry of Incentives (No Liability & Strict Liability) the victim's incentives for precaution
under "no liability" are the same as the injurer's incentives under "strict liability" & vice versa

, Creating Incentives for Efficient Precaution - if only the victim can take precaution, then a
rule of no liability provides incentives for efficient precaution; victim internalizes the cost of
harm & the injurer externalizes it --> victim has efficient incentives
- if only the injurer can take precaution, then a rule of strict liability w/ perfect compensation
provides incentives for efficient precaution; injurer internalizes the cost of harm & the victim
externalizes it --> injurer has efficient incentives



Incentives for Efficient Precaution Dilemma Unilateral precaution describes circumstances in
which only one party to an accident can take precaution against it; neither the rule of strict
liability nor the rule of no liability creates incentives for efficient precaution by both parties



Bilateral/Joint Precaution describes circumstances in which the victim & the injurer can take
precaution & efficiency requires both parties to take precaution;
SC = (WvXv) + (WiXi) + [p(Xv, Xi)A]; neither the rule of strict liability nor the rule of no liability
creates incentives for efficient precaution by both parties



Paradox of Compensation cannot escape (Incentives for Efficient Precaution Dilemma) by
dividing the costs of harm between the victim & injurer because that will cause them to
externalize part of it --> incentives for deficient precaution



Solution to the Paradox of Compensation Negligence Rule - can give efficient incentives the
the victim & the injurer



Incentives for Precaution Under a Negligence Rule - a negligence rule w/ perfect
compensation & the legal standard equal to the efficient level of care gives the injurer
incentives for efficient precaution because the rational injurer takes precaution at the legal
standard in order to avoid liability for the harm caused by accidents
- a negligence rule that induces the injurer to escape liability by satisfying the legal standard
provides incentives for efficient precaution by the victim