The relatively simple structure of a tort problem provides one of the most fertile areas for the application of economic analysis to law.
The positive economic theory of tort law maintains that the common law of torts is best explained as though judges were trying to promote efficient resource allocation, that is, maximize efficiency.
The Coase (1960) theorem shows that if parties are allowed to negotiate and transaction costs are sufficiently low, legal entitlements will be reallocated efficiently. In the case of tort accidents, transaction costs are high. This is easily understood because the parties potentially involved in an accident are not easily identifiable ex ante, and the cost of acquiring the relevant information for bargaining can be high. This renders contractual arrangements a la Coase impracticable. In most tort situations the legal system thus needs to provide rules to give potential injurers and potential victims appropriate incentives to act as if they had to bear the total social cost of their activities. This is an important goal of tort law. Tort law is therefore justified when bargaining is not possible because high transaction costs are present, and banning an activity is undesirable given the social value of the risk-creating activity (Calabresi and Melamed, 1972).In order to create optimal incentives, liability rules need to induce parties to minimize the total social cost of accidents. The relevant variables for this tort problem are the cost of accidents, the cost of accident avoidance (precaution), and the administrative costs of the justice system. Every legal system chooses from various liability rules (for example, negligence, strict liability and so on) and safety standards to minimize the overall cost of accidents.
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- Backhaus Jürgen G. (ed.). The Elgar Companion to Law And Economics. Second Edition. Edward Elgar,2005. – 777 p.2, 2005
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