ÍNDICE DE PRECIOS DE CONSUMO (IPC)

The last model that we shall consider (see Figure 2.9) is simultaneously the most realistic and the most complicated account of tortious behaviour. The majority of accidents are most effi ciently avoided by both potential injurers’ and victims’ taking care, and by all those parties undertaking optimal activity levels. Unlike the three models addressed above, no perfect liability rule exists for bilateral- care scenarios with variable activity levels.

In this model, the social- welfare optimum is for both injurers and victims to take care and to engage in a low activity level. Having identifi ed the effi cient outcome, consider the incentive effects of the relevant liability standards. We shall assume that the parties face a binary choice as to activity levels: low and high.

Injurer Activity Level Injurer Utility Victim Activity Level Victim Utility Injurer Care Cost Injurer Care Victim Care Cost Victim Care Ex. Accident Cost

S.W. Low 100 Low 40 No 0 No 0 90 50 High 130 Low 40 No 0 No 0 130 40 Low 100 High 70 No 0 No 0 125 45 High 130 High 70 No 0 No 0 165 35 Low 100 Low 40 Yes 30 No 0 50 60 High 130 Low 40 Yes 30 No 0 90 50 Low 100 High 70 Yes 30 No 0 85 55 High 130 High 70 Yes 30 No 0 125 45 Low 100 Low 40 No 0 Yes 20 60 60 High 130 Low 40 No 0 Yes 20 100 50 Low 100 High 70 No 0 Yes 20 95 55 High 130 High 70 No 0 Yes 20 135 45 Low 100 Low 40 Yes 30 Yes 20 20 70 High 130 Low 40 Yes 30 Yes 20 60 60 Low 100 High 70 Yes 30 Yes 20 55 65 High 130 High 70 Yes 30 Yes 20 95 55 Figure 2.9

1. No liability

In a bilateral- care environment with variable activity levels, no liability is ineffi cient because it creates no incentive for tortfeasors to take care or to engage in the activity at the optimal rate. It does carry the benefi t, however, of inducing victims both to take optimal precautions and to engage in the proper activity level. To explore these effects, consider the following payoff matrix:

Absent any liability in tort, neither injurers nor victims will consider the external costs of their various choices. As the injurers derive a benefi t of 130 under high activity levels, rather than a mere 100 under a low activity level, they will choose the former course. Simultaneously, they will elect not to take care, which costs them zero, because taking precautions would cost them 30.

Given the injurers’ decision to engage in a high activity level and not to take care, victims will choose between a cost of −90, −95, −80, or −85 corresponding to no care/low activity, no care/

high activity, care/low activity, and care/high activity, respectively. As the third option minimises their expected costs, victims will rationally pursue this course.

Victims

As the reader can readily confi rm, a no- liability regime in this example leads to ineffi cient behaviour by injurers, though not by victims. The resulting social- welfare level of 50 is less than the optimum of 70. Let us see if an alternative liability standard would yield a superior result.

2. Strict liability

Under a strict- liability regime, injurers bear all accident costs. As a result, victims maximise their welfare by engaging in a high activity level (because it confers greater utility than pursuing a low activity level) and by declining to take care (because taking precautions would impose costs on the victims that would not translate into any private gain). Victims’ decision not to take care, of course, is ineffi cient.

Given victims’ choice, injurers’ rational decision is to take care and to engage in a low activity level. Injurers’ behaviour under a strict- liability rule is thus effi cient. To understand the parties’

decision making, consider this payoff matrix:

Regardless of injurers’ choice, victims are best off by engaging in a high- activity level and by taking no care, which results in an expected value of 70. This choice is thus the victims’ dominant strategy. Knowing this fact, injurers can choose between a cost of −25, −35, −15, and −25 by taking no care/low activity, no care/high activity, care/low activity, and care/high activity, respec-tively. Obviously, −15 is the least bad result for injurers.

BILATERAL- CARE SCENARIOS WITH VARIABLE ACTIVITY LEVELS | 81

The injurers’ rational choice, therefore, is to minimise their losses by engaging in a low- activity level and by taking care. Net social welfare under strict liability is therefore 55. This is inef-fi cient, as the social- welfare optimum would yield welfare of 70. The inefinef-fi ciency results from the fact that strict liability, by insuring the victims against any loss, creates no incentive for them to take care or to reduce activity levels, even though it would be effi cient for them to do so.

Victims

3. Negligence (with or without contributory or comparative negligence)

Under a negligence regime, injurers can avoid the entire cost of accidents by taking proper precau-tions. To see whether this liability standard induces optimal behaviour, we shall consider the model once more through the lens of game theory (see Figure 2.12).

Begin with injurers. If victims take no care and engage in low- activity levels, injurers can derive a return of 10, 0, 70, and 100 by taking no care/low activity, no care/high activity, care/low activity, and care/high activity, respectively. Injurers will, of course, choose the last option. In fact, the injurers will choose to take care and to engage in a high activity level regardless of victims’

choice, thus making “care/high activity” injurers’ dominant strategy. Knowing this fact, victims can only choose between −50, −55, −40, and −45. They will choose a combination of due care and low activity levels to minimise their expected costs at −40.

Thus, a negligence standard will lead accident victims to behave effi ciently, but will not lead injurers to do so. Although injurers have an incentive to take care, they have no incentive to reduce their activity levels. This result holds true, regardless of whether the courts introduce contributory or comparative negligence to the legal standard.

4. Strict liability with contributory or comparative negligence

Strict liability induces potential tortfeasors to behave optimally, but imparts no incentive on victims to either take care or to effi ciently reduce activity levels. We can improve on this result by intro-ducing either contributory or comparative negligence to the strict liability standard. The injurers will behave as they do under pure strict liability, but now the victims will exercise due care because the cost of their doing so (30) is always less than the expected accident cost that their taking precautions enables them to avoid. Strict liability with contributory or comparative negligence, however, will not induce the victims to engage in a low- instead of a high- activity level. This is

because the reducing activity levels of the victim imposes a cost upon them of 30 (70 – 40), but no benefi t, as the reduced accident cost of 35 inures solely to the benefi t of tortfeasors.

5. No perfect rule

There is no liability standard that spurs both injurers and victims to act effi ciently in bilateral- care scenarios with variable activity levels. As many accidents are avoided at lowest cost by both tort-feasors’ and victims’ taking care and by altering activity levels, this fact is signifi cant. Courts, in implementing liability standards in tort, should therefore consider whether it is more important for injurers or victims to alter activity levels. If it is the former, the courts should impose strict liability with contributory or comparative negligence. If altered activity levels on the part of victims would have a greater impact on social welfare, the courts should use a negligence standard, with or without contributory or comparative negligence.