Positive Externalities and the Economics of Proximate Cause
29 Pages Posted: 9 May 2017 Last revised: 13 Jul 2017
Date Written: May 8, 2017
Should drug manufacturers be liable to consumers who overall benefited substantially from a drug for unavoidable and reasonable negative side-effects, just because the drug is defective with regard to other side-effects or other consumers? Should a surgeon be liable for a typical and reasonable risk that materialized during the surgery just because another risk, an unreasonable one, that did not materialize, rendered the treatment problematic?
Common sense and fairness point to a negative answer: actors should be liable for the unreasonable risks created not for reasonable risks. The Third Restatement of Torts embraced this traditional view of proximate cause (scope of liability) by excluding foreseeable reasonable risks from the scope of negligence liability, imposing liability only for unreasonable tortious risks. This is the harm within the tortious risk standard -- HWTRS.
But is there also economic justification for the HWTRS? Is it also welfare enhancing? Leading scholars in the field, like Robert Cooter and Ariel Porat, have argued that the HWTRS is inefficient. Efficiency, they argue, requires that liability should be imposed on all foreseeable harms that were considered by the court, without excluding reasonable harms, and therefore the Third Restatement's HWTRS, which provides otherwise, is inefficient.
In response, this article provides the missing economic explanation for the desirability of HWTRS with respect to reasonable risks. The exclusion of reasonable risks from the scope negligence liability by the HWTRS is welfare-enhancing because these reasonable risks often involve "externalized benefits" -- social benefits that actors disregard because they do not benefit from them. As the economic aim of tort law is to internalize externalities, it should also internalize the benefits of reasonable risks, to avoid over-deterrence. The HWTRS, this article shows, does exactly that -- it internalizes the externalized benefits of reasonable risks. Moreover, this "internalized-benefits analysis" provides additional economic support for the exclusion, by the HWTRS, of other kinds of risks from the scope of liability, including unforeseeable and background risks.
The proposed "internalized-benefits analysis," though, also draws the lines and limits of the efficiency of the HWTRS in excluding different kinds of risks from the scope of liability. Another insight of this analysis is that the iconic Hand Formula, the cornerstone of economic analysis of tort law, should be limited to determining whether the actor was negligent and should not be employed to determine the scope of liability.
Keywords: torts, negligence, externalities, economic analysis of tort law, proximate cause, Hand Formula, Coase
JEL Classification: K13, D61, D62
Suggested Citation: Suggested Citation