QUESTION 2: (25 Marks)
For which liability standard would you expect the litigation costs to be greater—
negligence or strict liability? Why? Is that an additional efficiency argument for
preferring one standard to the other?
On a case-by-case basis, litigation costs are likely to be higher for negligence.
Unlike strict liability, negligence requires establishing that a duty of care existed
between the injurer and the plaintiff, and that the injurer failed to meet the
requisite standard of care. (5 marks)
However, the effect on overall efficiency is less clear. Higher costs may dissuade
potential claimants, leading to under-compensation. Potential defendants may
then underinvest in precaution, leading to more accidents. On the other hand,
high litigation costs may make it optimal avoid those costs, leading to higher
precautionary spending. (Text p. 242) (5 marks)
A legal system like strict liability can save administrative costs by reducing the
probability of liability and offsetting this fall with an increase in damages. (Text p.
243) - (5 marks)
QUESTION 3: (25 Marks)
Compare the simple economic goals of criminal law and tort law.
The economic goal of criminal law, or efficient deterrence, balances two basic kinds of social
costs: the net harm caused by crime and the resources spent on preventing it. (5 marks)
First, the criminals gain something, and the victims suffer harm to their persons or property. The
resulting social harm, according to the standard view among economists, equals the net loss in
value. (5 marks)
Second, the state and the potential victims of crime expend resources to protect against it. (5
marks)
Criminal law should minimize the social cost of crime, which equals the sum of the harm it causes
and the costs of preventing it. (Text p. 474)
The economic goal of tort law means a sum of money sufficient to make the victim of an injury
equally well off with the money and the injury as he or she would have been without the money or
the injury. (Text p. 492) (5 marks)
The principal goal of tort law is to induce the internalization of precaution that confers a benefit on
another. Tort law does not generally seek to induce potential injurers to take care to minimize
their own harms. (5 marks)
See Question 12.16
QUESTION 4: (25 Marks)
How do full employment and high wages contribute to the power of fines as a
deterrent?
Opportunity costs from crime increase when employment and income improve is
correct. (Text, p. 509) (5 marks)
Imprisoning more people for longer periods may not be the most efficient way to
reduce crime. A leading alternative to imprisonment is fines. (Text, p. 509) (5
marks)
With white collar crime, some white-collar criminals perceive, perhaps
irrationally, that they are underpaid, so they give themselves "raises" by stealing.
(5 marks)
High-income criminals suffer a much larger loss in subsequent earnings due to a
criminal conviction than do low- and medium-income criminals.
(5 marks)
A legal system can save administrative costs by reducing the probability of
criminal liability and offsetting this fall with an increase in fines.
(5 marks)
QUESTION 1: (25 Marks)
(a) (15 Marks) Who is the ultimate bearer of the costs of harm under a rule of
simple negligence? Explain your answer.
The "ultimate bearer" of harm is an economic (not legal) proposition and it basically
means the party who can most efficiently bear the loss.
In general, the ultimate bearer of harm internalizes the benefits of any of his or her
actions that reduce the probability or severity of accidents, including more precaution
and less activity. [See p. 212]
In simple negligence that would be the claimant. [See p. 204]
(b) (10 Marks) Draw a fully labelled diagram illustrating your answer in (a).
QUESTION 2: (25 Marks)
For which liability standard would you expect the litigation costs to be greater—
negligence or strict liability? Why? Is that an additional efficiency argument for
preferring one standard to the other?
On a case-by-case basis, litigation costs are likely to be higher for negligence for the
Claimant.
Unlike strict liability, negligence requires the claimant establishing that a duty of care
existed between the injurer and the claimant, and that the injurer failed to meet the
requisite standard of care. (Text p. 197)
However, the effect on overall efficiency is less clear. Higher costs may dissuade
potential claimants, leading to under-compensation. (Text p. 242)
For potential defendants it is optimal to adopt the optimal standard of care leading to
higher precautionary spending, even though they legally need not do so.
QUESTION 3: (25 Marks)
Assume the acquisition of computers by criminals increases the difficulty of
capturing them by the police. Explain how this effects the marginal benefit and
marginal cost of committing crimes by criminals? Propose a law or policy to
counter the effects you explained.
For criminals, their marginal costs fall, so the optimal amount of crime rises as it becomes more
profitable to do it. For criminals, MC shifts to the right.
If police apprehension of criminals becomes more costly, the optimal amount of crime rises, as efforts
to reduce crime fall.
For society, MSC shifts to the left.
Policies could include giving police better tools and making the penalties for cyber crimes more
severe.
QUESTION 4: (25 Marks)
Page 5
A group of risk neutral computer science graduates from Ryerson decide to form
a gang to raid bank accounts from local banks. Each gang member agrees to
divide the proceeds of crime equally in the amount B = $50,000 per member.
The opportunity cost of going to jail is T = $2,000 per month. p is the probability
of being caught and convicted. S is the length of jail time measured in months
that is imposed as a sentence.
1. (a) (10 Marks) What is the condition that describes when one of these
will commit a crime?
B > pTS
2. (b) (10 Marks) Suppose there are 80 gang members and p = 0.25. What is
the optimal sentence?
pTS < B
S > B/pT
S > 50,000/(0.25)(2,000)
According to this model, if the sentence is set at a mandatory minimum of 8 years and 4
months, no crime would be committed, provided the 80 gang members are rational.
3. (c) (5 Marks) Suppose for every $1 earned by the gang member, there is
an additional public social cost of $3. What are the social costs? Explain
In this model, the social costs = $0 since the mandatory minimum works to deter the 80 gang
members.
QUESTION 1: (25 Marks)
Discuss the effects of compensation ceilings or caps for personal injury claims on
the behaviour of claimants and defendants under strict liability, simple
negligence and no fault legal systems.
The main argument for all 3 systems is that claimants (and their lawyers)
increase the volume of more claims (substitution effect) to compensate for a
loss of bigger claims (income effect)(analogy to landlords) (p. 265).
Potential injurors (analogous to tenants) perceive a lower cost to their activity
levels under caps. (p. 265) and may reduce their standard of care if the caps are
not modest.
Caps or ceilings on the amount of compensation will not affect the standard of
care applied by potential defendants under any of the negligence systems,
including, simple negligence or no fault (pp, 206, 218 - 219).
Caps or ceilings will potentially lower the standard applied in situations
involving strict liability (pp. 203, 218 - 219) unless the ceilings are modest (not
significantly different from the unrestricted law).
(9 marks) each student’s best case
(8 marks) – other 2 cases each
Full marks require explaining the effect of a cap on both the claimant and
defendant with reasoned arguments.
QUESTION 2(a): (12.5 Marks)
Explain, using a diagram, what happens to the behaviour of defendants in
comparative negligence cases when a judge errs on the issue of liability
(whether or not a party is negligent).
If the courts however make errors increasing (decreasing) the standard of care,
rational defendants will increase (decrease) precaution in their activity levels.
(Text, p. 219)
(6.5 marks) for appropriately labelled graph showing change in standard of care.
(6 marks) for reasoning and explanation
QUESTION 2(b): (12.5 Marks)
Compare and contrast your answer in QUESTION 2(a) with the case when the
judge’s error is not on liability, but on awarding too much compensation to the
claimant.
When potential injurors know they are subject to any of the negligence systems,
including, comparative negligence, modest errors increasing (decreasing)
damages (compensation) by claimants, juries or judges will not motivate
rational defendants to change their standard of care if the court imposes the
most efficient standard of care. (Text, p. 219)
Full marks for reasoning and explanation – graph not required for full marks.
QUESTION 3: (25 Marks)
Carefully analyze the impact of the Supreme Court of Canada imposing
mandatory time limits on the length of criminal prosecutions. Discuss the
impact of time limits on the decision of criminals to commit crime, on the
number of prosecutions undertaken by crown attorneys (Canadian prosecutors)
and the number of plea bargains made between Crown attorneys and
defendants who are charged with committing crimes.
Many students confused mandatory minimum sentences with mandatory time
limits (Time limits imposed on the length of a trial proceeding). Either
interpretation is accepted as a correct answer.
Both mandatory minimum sentences and time limits hamper Crown prosecutions.
Both limits will result in more plea bargains, more expensive trials, more
acquitals, and fewer trials due to costs. Crown attorneys are forced to consider
the outright withdrawal or dropping of charges, because they cannot negotiate
sentencing within the sentencing limits set by Parliament or finish a trial within
the time limits set by the Supreme Court. (Lecture 9 – Slides 18 to 23)
Even where punishments appear to be clearer and more severe, risk averse
criminals might reduce their crime levels, but this will likely be offset by the
perception that convictions or jail is less likely – so risk neutral and risk
preferring criminals (repeat offenders) are inspired to commit more crime. So
Canada sees more arrests and more crime by repeat offenders, fewer convictions
and more plea bargaining.
In the case of time limits imposed on length of trials there would be less of a
deterrent effect. Risk averse criminals would have less reason to reduce crime
levels as they perceive plea bargains to be a more likely outcome.
Full marks for reasoning and explanation – including explaining the change – up
or down, increase or decrease, etc.
(9 marks) – best-argued part (decision to commit crime, number of
prosecutions, number and quality of plea bargains)
(8 marks) – other 2 parts each
QUESTION 4: (25 Marks)
Why should the law punish a person more severely for committing the same
crime deliberately rather than spontaneously?
”A crime may be committed spontaneously in the sense that the criminal did
not make any plans in advance. Spontaneous criminals do not search out
opportunities to commit crimes, but when opportunities come their way, they
avail themselves of them.” (Text, p. 469)
“At the opposite extreme, crimes may be carefully planned out in advance and
all the possibilities weighed. Thus, a premeditated crime shows a greater degree
of deliberation than a spontaneous crime.” (Text, p. 469)
From the economic point of view, deliberate crimes result in the reallocation of
socially beneficial activities to more negative activities. This is a type of social
cost justifying the application of a higher level of punishment imposed on the
criminal.
Full marks – must show an understanding of the difference between committing
a crime deliberately versus spontaneously and give an economic explanation for
the differences in punishment. (Text, p. 469)
QUESTION 1: (25 Marks)
Explain why counterfeiting money is a crime. Who is the victim? Is there a
private victim as well as public victims?
There is a private bad and a public bad component to the crime. The private bad might appear to be
minor. It might be no more than the actual amount of the money counterfeited. The counterfeit money
held by individuals and firms amount to a measurable private cost. These are private victims.
Counterfeiting leads to additional social costs such as increasing the transaction costs of money itself –
in the form of costs created by increased security and printing precautions as well as non-cash
alternatives and credit checks at banks. Increased specialized fraud squads are needed to track down
the counterfeiters. This increases government spending and taxes on police, prosecution and court
services.
QUESTION 2: (25 Marks)
When statutes prescribe the exact punishment for each crime, the judge’s
discretionary power decreases and the prosecutor’s increases. Predict how this
change might affect the charges made against arrested persons.
Mandatory minimums are examples. Any rigidity that hampers plea bargains will result in fewer plea
bargains, more expensive trials, more not guilty verdicts and fewer trials due to costs, where Crown
attorneys are forced to consider the outright withdrawal or dropping of charges, because they cannot
negotiate sentencing.
Even where punishments appear to be clearer and more severe, risk averse criminals might reduce their
crime levels, but this will likely be offset by the perception that convictions or jail is less likely – so risk
neutral and risk preferring criminals (repeat offenders) are inspired to commit more crime.
Canada would see more arrests and more crime by repeat offenders, fewer convictions and less plea
bargaining.
QUESTION 3: (25 Marks)
The common law did not hold parents liable for their children’s unintentional
torts unless the parents’ negligent supervision led directly to the tort. But the
common law did hold husbands vicariously liable for their wives’ torts (a rule
since abrogated by statute). Can you provide an efficiency explanation for these
common law rules?
There are circumstances in which one person may be held responsible for the torts committed by
another. Where this happens, the third party is said to be vicariously liable for the tortfeasor’s
acts.
The bare bones of this doctrine are that a parent or spouse will be held to answer for the torts of
an child or spouse.
The rule is likely inefficient in the case of children or spouses since, unlike hiring employees,
there are few, if any, occasions for the parent or spouse to take care in selecting children or mates
with a view to, in assigning them various tasks, in deciding with which tools to equip them, in
training them, in monitoring them, and more.
However, in the case of children, under a rule of negligent vicarious liability, the parent is liable
for harms caused by negligent supervision of a child, which would be more in line with the
efficiency outcome of expectation damages applied in negligence cases.
QUESTION 4: (25 Marks)
Who is the ultimate bearer of the costs of harm under a rule of comparative
negligence? Explain your answer.
The "ultimate bearer" of harm is an economic (not legal) proposition and it basically means the party
who can most efficiently bear the loss.
On p. 212, it says "In general, the ultimate bearer of harm internalizes the benefits of any of his or her
actions that reduce the probability or severity of accidents, including more precaution and less
activity."
In simple negligence, contributory negligence, and comparative negligence, that would be the
claimant. See p. 204.
The fact that the utility of the claimant in receiving compensation is subjective - imperfect damages -
so the claimant is in the best position to minimize this loss.
Related to this is asymmetry of information - some of the loss to the claimant is private - not known
to the courts or the defendants, or if known, is not verifiable in evidence, so again the claimant is in
the best position to minimize this loss.
