A “tort” is an injury to someone’s person, reputation, or feelings or damage to real or personal property.1 Under the U.S. system of tort liability, courts can hold injurers liable for many different types of torts, such as automobile accidents, contract fraud, trespass, medical malpractice, and injuries associated with defective products.
Several bills now before the Congress seek to address concerns that critics have raised about the tort system or about certain types of tort cases. Among those concerns are that:
The “transaction costs” of the system, particularly attorneys’ fees, are too high;
Punitive damages and compensatory damages for pain and suffering are often awarded arbitrarily, with no beneficial effect on safety;
The class-action mechanism (whereby many claims that cover similar factual ground are combined into a single larger case) is easily abused by plaintiffs’ attorneys;
Medical malpractice lawsuits are driving up the costs of liability insurance for physicians to the point that some of them are restricting their practices or retiring; and
In suits over exposure to asbestos, too much money and court time are being devoted to people who do not yet show any signs of physical impairment.
Conversely, supporters of the existing tort system argue that it serves important policy goals, such as compensating victims, holding injurers responsible for their actions, and improving safety. Supporters say that critics overstate the extent and severity of the perceived problems with the system. They further argue that many of the proposed changes are too broad and that major problems can be addressed by the courts or through more narrowly targeted legislation, perhaps at the state level, where the vast majority of tort lawsuits are filed.
This primer looks at the current tort system—and various options for changing it—from an economic perspective, focusing on the goals of efficiency (minimizing the system’s total cost to the economy) and equity (treating all parties fairly). Data about the overall costs and benefits of tort liability are too scarce to allow economists to judge the efficiency of the current system. However, those data suggest that the system is a relatively expensive way to compensate victims and, thus, that any justifications for it must be based on its effects on deterring injuries, promoting equity, or both.
The economic perspective leads to some other general conclusions about tort liability:
Using the tort system to supplement market forces may improve or reduce efficiency, depending on what incentives the system creates for potential injurers and potential victims and on the interactions between those incentives, government regulations, and private insurance policies;
Altering the tort system generally involves some trade-offs—in particular, changes that seem likely to improve efficiency may be problematic in terms of equity, or vice versa;
Federal involvement in what is now mainly a matter of state law might yield more-efficient interstate commerce, but it could limit innovation at the state level (as well as restrict the states’ ability to offer contrasting liability regimes to appeal to different residents); and
The same policies may not be appropriate for all types of tort cases, because efficiency requires minimizing the sum of several kinds of costs, which may vary in their relative importance from one category of tort to another.