The goals of tort law
A first intuitive end of tort law is to compensate the victims for losses due to accidents. This is indeed an important task of tort adjudication but it is not the central issue concerning the design of tort rules.
It has been shown that tort law is a very expensive means of compensating harms, because it involves high administrative cost due to the functioning of the judicial system. Insurance, to the contrary, is a much cheaper and quicker system (Shavell, 1987: 263): if the only goal were to compensate victims, first-party insurance would be preferable over tort liability. Moreover, the cost of insurance can be paid by the potential injurers, shared among potential victims or financed by taxpayers, in order to redistribute the costs (McEwin, 2000).On the contrary, economic analysis suggests that the primary reason for utilizing the tort system is to allow risk-creating activities to be carried out only if the social value of the activity justifies the risk created. This balancing of costs and benefits is currently endorsed by North American tort doctrine and is clearly summarized by the Restatement (Second) of Torts § 291:
Where an act is one which a reasonable man would recognize as involving a risk of harm to another, the risk is unreasonable and the act negligent if the risk is of such magnitude as to outweigh what the law regards as the utility of the act or of the particular manner in which it was done.
(The Restatement (Second) of Torts §§ 292 and 293, indicate the criteria for verifying utility of conduct and magnitude of risk.)
More specifically, economic analysis suggests that tort law should be designed in such a way as to provide potential injurers and victims with appropriate incentives to avoid the accident by internalizing the externalities created by their activities. In the absence of tort liability, potential tortfeasors would bear the private cost of their precaution without internalizing any of the benefits thereof.
The benefits (of precaution) are external with respect to the decision (on how much precaution). This would lead to suboptimal levels of care and excessive accident rates. Through tort liability, a potential tortfeasor internalizes the benefits of his/her precaution, that is, the reduction in expected liability. Tort rules should thus be designed to induce parties to internalize the external costs of their activities and to adopt optimal levels of precaution.In addition, tort law gives parties incentives to acquire information about the accident. With respect to risk, the tort law system should enhance an optimal allocation of the risk between victim and injurer, but this goal can be reached via insurance. With respect to transaction costs, the goal of the tort law system is to minimize the administrative cost associated with the functioning of the system itself (mainly the costs of courts and lawyers and the indirect costs borne by litigants). Calabresi (1970) presented the first formulation of the ends of liability in those terms, while Brown (1973) formalized an economic model of accidents. We shall focus on incentives towards optimal precaution and discuss the other aspects in passing.