Efficiency, Fairness, and the Economic Analysis of Tort Law
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Description
Throughout its history, the economic analysis of tort law has been largely limited to one question: How should tort rules be formulated so as to minimize the social cost of accidents? Throughout its history, the economic analysis of tort law has also been controversial. The two phenomena are related. It is highly controversial whether tort law should minimize accident costs to the exclusion of fairness concerns, which in turn has fostered the belief that the economic analysis of tort law is controversial. The controversy associated with the economic analysis of tort law was initially stirred up by the provocative work of Richard Posner. Although he was not the first to apply economic analysis to tort law, Posner strongly influenced the newly developing field by forcefully propounding the claim that tort law should maximize wealth by minimizing accident costs. The approach ultimately foundered as scholars, including Posner, recognized that cost–benefit analysis cannot determine initial entitlements, the basic architecture of any legal rule. The specification of initial entitlements, and thus the substantive content of any legal rule, depends on normative justification and not economic analysis. This limitation of economic analysis was subsequently addressed by Louis Kaplow and Steven Shavell, who have constructed a proof showing that a “fair” tort rule can violate the Pareto principle by preventing the adoption of a welfare- maximizing, “unfair” tort rule. By showing how a principle of fairness can prevent such a Pareto improvement, Kaplow and Shavell provide a reason for rejecting a fair tort system in favor of one that maximizes welfare. This reason also provides a justification for the conventional economic analysis of tort law. A welfare-maximizing tort system ordinarily relies on cost-minimizing liability rules, thereby reestablishing the dominant role of economic analysis. All issues of concern to the tort system ought to be resolved in the cost-minimizing manner, the general method for maximizing social welfare and wealth. Not surprisingly, the claim that tort law should be nothing more than an exercise of cost minimization has provoked an equally extreme response from critics. The most forceful critique has come from those who maintain that tort liability is best justified by the principle of corrective justice. This principle is based on an individual right that imposes an obligation or duty on another individual. A duty-holder who violates the correlative right has committed a wrong, creating a duty to repair or correct any wrongful losses suffered by the right-holder. This rights-based principle of justice “rules out the economic analysis of [tort] law.” Such sweeping claims about the irrelevancy of economic analysis must be understood in context. If the appropriate rationale for tort liability is a rights-based principle such as corrective justice, then the justification for a liability rule does not depend on whether it is allocatively efficient. Economic analysis is ruled out as irrelevant to the rights-based justification for tort liability. Allocative efficiency does not need to be the norm of tort liability in order to make economic analysis relevant. Economic analysis is not limited to issues of allocative efficiency and cost minimization. It is an open question whether a rights-based tort system would employ economic analysis, and if so, how. No doubt, many believe that this question does not merit serious consideration. The conventional economic analysis of tort law asks whether a liability rule would minimize accident costs by deterring accidents in the future. That forward-looking inquiry seems to be utterly irrelevant to the backward-looking normative question: Is compensation in this case warranted because the defendant was responsible for violating the plaintiff’s right? Despite superficial appearances, the idea that economic analysis is incompatible with or irrelevant to a rights-based principle of justice is mistaken. A rights-based torts system can be fully compatible with the relevant requirements of welfare economics, contrary to the understanding one can easily gain from contemporary tort scholarship. The compatibility is not merely formal. Economic analysis is integral to any plausible rights-based tort system.
Source Publication
Theoretical Foundations of Law and Economics
Source Editors/Authors
Mark D. White
Publication Date
2009
Recommended Citation
Geistfeld, Mark A., "Efficiency, Fairness, and the Economic Analysis of Tort Law" (2009). Faculty Chapters. 714.
https://gretchen.law.nyu.edu/fac-chapt/714
