Supplementary note

Setting the legal standard of care

What happens where there is a negligence rule and the legal standard of care is not equal to the
social optimum?
Let
x

cost of care

xS

socially optimal cost of care

xL

cost of legal standard of care

xP

potential tortfeasors private optimum cost

cost of care + expected cost of accidents

cost of care + expected damages

Case 1: xL = xS the legal standard is equal to the social optimum

D=E

xP=xL=xS

Case 2: xL < xS the legal standard is less than the social optimum

D
xP=xL

xS

Case 3: xL > xS the legal standard is greater than the social optimum
Case 3.1

E
D

xS

xP=xL

Case 3.2

D=E

xP=xS

xL

Conclusions
If the legal standard is lower than the social optimum:
T will comply with the legal standard, taking less than socially optimal care
Total social cost will be greater than the minimum
V will bear an expected cost of accidents greater than the social optimum
If the legal standard is higher than the social optimum by a small amount:
T will comply with the legal standard, taking more than socially optimal care
Total social cost will be greater then the minimum
V will bear an expected cost of accidents greater than the social optimum
If the legal standard is higher than the social optimum by a large amount:
T will not comply with the legal standard but will take the socially optimal amount of care
Total social cost will be minimised
T will bear the full (socially optimal) cost of accidents

Setting the quantum of damages

Strict liability with damages (D) > cost to victim (A)
x+p(x)D
x+p(x)A

xS

xP

Negligence with D > A

x+p(x)D
x+p(x)A

xP=xL=xS
Conclusion : getting the quantum of damages wrong affects care under strict liability but not
under negligence