ECO320 Test 2 UPDATED ACTUAL Exam Questions and CORRECT Answers

ECO320 Test 2 UPDATED ACTUAL Exam
Questions and CORRECT Answers
Strict Liability Tort - CORRECT ANSWER 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 - CORRECT ANSWER 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 - CORRECT ANSWER careless neglect, often resulting in injury



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


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


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


Efficient Level of Precaution - CORRECT ANSWER 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" - CORRECT ANSWER 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 - CORRECT ANSWER any behavior reducing the probability or magnitude of an
accident


Incentives for Precaution in the Simple Model - CORRECT ANSWER 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) - CORRECT ANSWER 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) - CORRECT ANSWER 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) - CORRECT ANSWER 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) - CORRECT ANSWER harm is
suffered & bear by the victim --> no incentive for injurer to take precaution


Rule of No Liability (Injurer) - CORRECT ANSWER 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) - CORRECT ANSWER causes the
injurer to internalize the marginal costs & benefits of precaution, which gives incentives for
efficient precaution

, Symmetry of Incentives (No Liability & Strict Liability) - CORRECT ANSWER 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 - CORRECT ANSWER - 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 - CORRECT ANSWER 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 - CORRECT ANSWER 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 - CORRECT ANSWER 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 - CORRECT ANSWER Negligence Rule - can give
efficient incentives the the victim & the injurer


Incentives for Precaution Under a Negligence Rule - CORRECT ANSWER - 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