Mattiacci, Giuseppe Dari; Parisi, Francesco --- "The Economics of Tort Law" [2005] ELECD 130; in Backhaus, G. Jürgen (ed), "The Elgar Companion to Law and Economics, Second Edition" (Edward Elgar Publishing, 2005)

Book Title: The Elgar Companion to Law and Economics, Second Edition

Editor(s): Backhaus, G. Jürgen

Publisher: Edward Elgar Publishing

ISBN (hard cover): 9781845420321

Section: Chapter 6

Section Title: The Economics of Tort Law

Author(s): Mattiacci, Giuseppe Dari; Parisi, Francesco

Number of pages: 16

Extract:

6 The economics of tort law
Giuseppe Dari Mattiacci and Francesco Parisi


The relatively simple structure of a tort problem provides one of the most
fertile areas for the application of economic analysis to law. The positive
economic theory of tort law maintains that the common law of torts is best
explained as though judges were trying to promote efficient resource alloca-
tion, that is, maximize efficiency. The Coase (1960) theorem shows that if
parties are allowed to negotiate and transaction costs are sufficiently low, legal
entitlements will be reallocated efficiently. In the case of tort accidents, trans-
action costs are high. This is easily understood because the parties potentially
involved in an accident are not easily identifiable ex ante, and the cost of
acquiring the relevant information for bargaining can be high. This renders
contractual arrangements à la Coase impracticable. In most tort situations the
legal system thus needs to provide rules to give potential injurers and potential
victims appropriate incentives to act as if they had to bear the total social cost
of their activities. This is an important goal of tort law. Tort law is therefore
justified when bargaining is not possible because high transaction costs are
present, and banning an activity is undesirable given the social value of the
risk-creating activity (Calabresi and Melamed, 1972).
In order to create optimal incentives, liability rules need to induce parties
to minimize the total social cost of accidents. The relevant variables for this
tort problem are the cost of ...