Vehicle Accidents The following table treats a situation of dual causality: acci

Question

Vehicle Accidents The following table treats a situation of dual causality: accidents between cars and tanks, in which only the cars suffer damage, and in which both observable and unobservable actions by car and tank drivers affect the frequency of collisions. The columns correspond to alternative property rules, and the rows to different types of action, and the cell entries indicate whether the rule provides an optimal level of incentive. Assume that that all types of care are 0-1 (either a driver takes a particular type of care or she does not) and that the expected social cost of accidents per driver exceeds the cost of taking all types of care. Explain why strict liability with contributory negligence does not provide car drivers with the optimal level of incentive to take unobservable actions to avoid accidents. Suppose that cars can avoid accidents considerably more easily than tanks because they are more maneuverable. In terms of incentives, which legal rule is the most efficient? Which legal rule results in the lowest litigation costs? The table is drawn up ignoring insurance. The provision of insurance reduces the incentive to take care (moral hazard). What features of vehicle accident insurance reduce the moral hazard problem? (|The damage awards under the above legal rules are ex post punishments. Indicate one type of ex ante punishment in the context of the example, and name one benefit of supplementing the above legal rules with this type of ex ante punishment.

Explanation / Answer

Ans a – A negligent injurer can escape liability if the victim was also being negligent. For example, if I’m driving carelessly (talking on my phone, changing CDs) and hit someone, I may be liable; but if I can show that the guy I hit was drunk, and stumbled into the street right in front of me, his negligence cancels out mine and I don’t owe him damages. This is called contributory negligence. As cars can avoid accidents more easily, they are the ones who are more responsible to avoid such situations and hence their unobservable care will not provide incentive.

Ans b – Strict Liability with contributory negligence is the most efficient one in terms of incentives. As explained above tanks cannot avoid certain situations or accidents even if they take full care while driving on the other hand cars can hence this rule will result in the best incentives.

Ans c – Strict Liability with contributory negligence will result in lower accidental rate which will result in lower litigation costs.

Ans d – Co-insurance, co-payments and deductibles reduce the risk of moral hazard.

Ans e - A third type of rule holds that if both parties are negligent and an accident occurs, then since they share the blame, they should share the responsibility. This is referred to as comparative negligence.

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