Question

5. Tort law, by assigning liability to various parties the for losses due to accidents, affects the incentives for those parties to take precautions to avoid accidents. Complete this sentence:

According to economists, socially optimal tort law will lead to behavior that minimizes . . .

Answer 1

The statement can be understood and completed by analyzing its various parts logically:

Tort law, by assigning liability to various parties the for losses due to accidents, affects the incentives for those parties to take precautions to avoid accidents.

Interpretation:

Due to provisions of tort law, specific liabilities are assigned to various parties. For example, there will be a specific liability to the driver of a car. Similarly, there will be liability to the owner of a car. There may be some protection provided to bystanders, or third parties.

By assigning such liabilities, the incentives of such parties change. Now, someone who is driving a car, is liable for the consequences of taking excessive risk. The owner of the car will also select a driver wisely.

Thus, to complete the statement,

According to economists, socially optimal tort law will lead to behavior that minimizes moral hazard.

In other words, people who would have behaved recklessly, and taken extra risks, will now be cautious.

This is because, it is observed that, if someone is protected against risk, he or she may take extra risks. For example, a car owner with comprehensive insurance, may drive carelessly. This is known as moral hazard.

But presence of tort law against such behavior, will minimize such risks.