The various forms of strict-liability and negligence standards used by the courts encourage potential injurers to exercise care and result in compensation to victims in different ways and to different extents. Neither type of standard, however, reliably induces optimal levels of care and participation by both injurers and victims, even in theory. Also, both types are prone to inefficiency in their effects on the distribution of risk.
In its purest form, strict liability compensates all victims except those judged to have caused the injury themselves or to have knowingly and voluntarily “assumed the risk” of exposure to a particular hazard. Strict liability thus gives potential injurers an incentive to make all socially efficient changes in the level or form of their activities, because they know they will face the full cost of almost any resulting harm (see Table 2). It may have a very different effect on potential victims, however. To the extent that they expect to be fully or almost fully compensated for their losses (which is more likely to occur in cases involving only property damage, not personal injury or death), strict liability gives potential victims little or no incentive to take reasonable precautions of their own.
In cases alleging defective products—a major category of tort claims subject to strict liability—U.S. courts typically do not apply strict liability in its pure form. Instead, they use a doctrine of comparative negligence.4 Under that variant of the standard, the compensation paid by an injurer is reduced if the victim is found to have contributed to the injury through his or her own negligence, as defined by some explicit or implicit legal standard. (In 1996, about 16 percent of all awards in tort trials in the nation’s 75 largest counties were reduced because of the plaintiff’s own negligence. Those reductions averaged 43 percent.)5 Taking comparative negligence into account is likely to improve the efficiency of strict liability to the extent that plaintiffs’ negligence is a broader concept than plaintiffs’ causation (or assumption of risk) and thus gives potential victims an incentive to avoid more types of careless behavior.6 But it still does not give them cause to adjust the scale of their risky activities, since standards for due care do not consider scale itself. For example, a negligence standard may dictate that bicyclists wear helmets and obey traffic rules, but it will not address how often they ride.
The same analysis applies in reverse when injurers are judged according to a negligence standard. If the standards of due care are set at ideal levels, potential injurers will make all efficient adjustments in the way they conduct their activities. In addition, potential victims who expect injurers to escape liability through the “safe harbor” of due care have an incentive to take all efficient precautions because they will bear the costs of any injuries. However, the standards for care typically do not provide any incentives about the scale of potential injurers’ activities. Thus, for example, a manufacturer whose rate of production defects is low enough to be considered nonnegligent will have no incentive to consider the costs of injuries associated with its defects when it decides how many units to produce.
Some observers point to another shortcoming of liability rules: by compensating victims for pain, suffering, and other nonpecuniary losses, those rules provide a kind of excessive and unwanted insurance that distributes risk inefficiently. (That issue applies less strongly to negligence, to the extent that injurers are able to avoid paying damages by meeting the standards of due care.)7
The argument is that pecuniary losses such as medical expenses and lost income increase a victim’s need for money (technically, the marginal utility of an additional dollar), but nonpecuniary losses do not and hence are not worth insuring against. Persuasive evidence for this argument is the fact that insurance policies bought directly by consumers typically do not cover events such as the death of a young child. Notwithstanding the great suffering they would feel, consumers apparently do not find it worthwhile to buy coverage that reduces their wealth now (by the amount of the insurance premium) in order to increase it in the event of such a loss. But liability awards for pain and suffering shift wealth in precisely that fashion—the prices that a firm charges for its goods and services reflect the future liability claims it expects to pay on them, and thus consumers fund the awards through higher prices that reduce their preinjury wealth. Whether such shifts are equitable depends on subjective judgments (on the one hand, they help compensate victims; on the other hand, they benefit a few at the expense of the many). Nevertheless, they do appear to distribute risk inefficiently.8
4. Comparative negligence is also widely applied in types of tort cases that are judged under a negligence standard. Its use in cases judged under strict liability may seem incongruous: in principle, a defendant may be liable even in the absence of any negligence against which to compare the plaintiff’s negligence. But current law essentially infers some degree of negligence (whether of design, manufacture, or labeling) whenever a plaintiff shows that a defective product caused an injury.
5. Department of Justice, Bureau of Justice Statistics, Tort Trials and Verdicts in Large Counties, 1996, NCJ 179769 (August 2000).
6. The impact of that incentive depends on potential victims’ awareness of it and on their expectations about how their behavior would affect the compensation they would receive if injured. If they expect to receive some compensation despite engaging in “mild” negligence, they may not be encouraged to make all cost-effective changes in their behavior. (Some states allow a defense of contributory negligence rather than comparative negligence; under that defense, negligent victims have their compensation eliminated rather than reduced.) Conversely, the possibility of reduced compensation under comparative (or contributory) negligence may be irrelevant if potential victims face risks of death or other injuries for which compensation would be greatly inadequate.
7. In principle, if potential injurers are able to avoid liability under a negligence standard, then consumers face the opposite problem of being underinsured against the risks of pecuniary losses. Consumers can solve that problem, however, by buying their own insurance to achieve the desired level of protection.
8. Note, however, that failing to incorporate the expected costs of nonpecuniary losses into the price of a good or service would not be efficient either. The risks of pain and suffering associated with an item are real components of its cost and should be reflected in its price; otherwise, consumer demand for the item may be inefficiently high. Ideally, potential victims would make their decisions about consumption on the basis of an item’s full cost but would receive some kind of payment to mitigate the impacts of the nonpecuniary costs on their wealth. One proposed mechanism for doing that—known as unlimited insurance subrogation—is discussed in Chapter 5.