Accident liability rules and externality

Abstract

By and large, the focus of the recent literature on the efficiency properties of liability rules has been upon the individual decision-maker and effects on the overall level of accident-related activity have been ignored. Exceptions are Posnert and Shavel12 Of the cases discussed by Shavell, we shall be concerned with one: that of accidents between strangers who have no market relationship to one another, as is the case, for example, in the typical automobile accident. For this case, Shave11 concludes that there is ‘. . . no conceivable liability rule that induces the parties to act efficiently.‘3 This is, we believe, a correct and important conclusion. We attempt to press it further here by explicitly treating the issue of the appropriate level of accidentrelated activities as a problem within the economics of externality. Two distinct externalities are identified, one which a liability rule cannot conceivably correct and one whose effects on resource allocation a conventional liability rule may make either better or worse. We then show that the liability rule that Tullock4 has attributed to Earl Thompson (under which both parties to an accident pay all of its costs: their own costs plus a fine equal to the costs of the other party) provides a solution to the second externality though not to the first. We conclude with a discussion of the relative merits of Earl Thompson’s liability rule and conventional rules.