Question

Demonstrate that the negligence rule provides efficient incentives for the negligent actor and the victim.

Why do we discount tort damages to the date of injury?

Answer 1

Negligence rule draws a line between liability and no liability by identifying a level of due care and verifying if the relevant party adopted that level of due care. In case of fault, it creates optimal incentives on both negligent actors as well as victims and also achieves efficiency in the case of bilateral precaution.

Negligence is a function of three variables:

1. Magnitude of risk - It is the probability of a harmful event occurring
2. Gravity of Harm - It is the seriousness of the damage that may result from this event
3. Burden of prevention - It is the cost of preventing the occurrence of the harmful event

The negligence criterion makes both parties take the optimal level of care in all situations (that is, unilateral, alternative and bilateral precaution), but gives incentives to choose an optimal activity level only to the victim. Tort rules can only direct efficient incentives with respect to activity level towards the victim, thus failing to enhance the other party’s efficient behavior.

Negligence rules under which the victim is the residual bearer give efficient incentives with respect to activity level only to the victim, the victim in those cases, while the strict-liability-based negligence rules (under which the injurer is the residual bearer: strict liability and strict liability with negligence defenses) give efficient incentives with respect to activity level only to the injurer in those remaining cases.