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The Allocative Efficiency of Shifting from a Negligence System to A Chicago-Kent Law Review Volume 73 Issue 1 Symposium on Second-Best Theory and Article 3 Law & Economics December 1997 The Allocative Efficiency of Shifting omfr a Negligence System to a Strict-Liability Regime in our Highly-Pareto-Imperfect Economy: A Partial and Preliminary Third-Best-Allocative-Efficiency Analysis Richard S. Markovits Follow this and additional works at: https://scholarship.kentlaw.iit.edu/cklawreview Part of the Law Commons Recommended Citation Richard S. Markovits, The Allocative Efficiency of Shifting omfr a Negligence System to a Strict-Liability Regime in our Highly-Pareto-Imperfect Economy: A Partial and Preliminary Third-Best-Allocative-Efficiency Analysis, 73 Chi.-Kent L. Rev. 11 (1998). Available at: https://scholarship.kentlaw.iit.edu/cklawreview/vol73/iss1/3 This Article is brought to you for free and open access by Scholarly Commons @ IIT Chicago-Kent College of Law. It has been accepted for inclusion in Chicago-Kent Law Review by an authorized editor of Scholarly Commons @ IIT Chicago-Kent College of Law. For more information, please contact [email protected], [email protected]. THE ALLOCATIVE EFFICIENCY OF SHIFTING FROM A "NEGLIGENCE" SYSTEM TO A "STRICT-LIABILITY" REGIME IN OUR HIGHLY-PARETO-IMPERFECT ECONOMY: A PARTIAL AND PRELIMINARY THIRD-BEST- ALLOCATIVE-EFFICIENCY ANALYSIS RICHARD S. MARKOVITS* INTRODUCTION ................................................. 20 1. DISTORTION ANALYSIS: THE VOCABULARY AND CONCEPTUAL STRUCTURE OF THIS ARTICLE ............ 30 1. The Basic Vocabulary of Distortion Analysis ......... 30 2. The Allocative-Efficiency Relevance of 7,D(PrA...) Figures ............................................... 32 A. When the Marginal Choice in Question Is Marginal in the Sense of Being Infinitesimally Small as Well as in the Sense of Being Last .... 33 B. When the Marginal Choice in Question Is Incremental Rather Than Infinitesimally Small 35 3. Predicting the Effect of a Given Change in a ParticularIndividual-Pareto-Imperfection-Generated Private-ProfitabilityDistortion on the Mean of the Distributionof Relevant I IID(PnA...) Figures ....... 37 II. THE EFFECT OF SHIFTING FROM NEGLIGENCE TO STRICT LIABILITY ON THE AMOUNT OF APCA- RELATED MISALLOCATION THAT POTENTIAL INJURERS GENERATE WHEN MAKING AVOIDANCE/NON- AVOIDANCE DECISIONS, LEGAL TRANSACTION-COSTS ASIDE: A PARTIAL AND PRELIMINARY TBLE A NALYSIS ............................... ................ 38 1. The Distortions in the Private Profitability to Potential Injurers Who Are Liable Only If Held Negligent of the APCA Moves of Different Types Available to Them ................................................ 41 A. The Aggregate Distortion in the Private Benefits That APCA Moves of Different Types * Lloyd M. Bentsen, Jr. Centennial Professor of Law, University of Texas School of Law; B.A., Cornell University, 1963; Ph.D., London School of Economics, 1966; L.L.B. Yale Univer- sity, 1968; M.A., Oxford University, 1981. CHICAGO-KENT LAW REVIEW [Vol. 73:11 Yield a Potential Injurer Who Is Liable Only If Found Negligent ................................ 41 (1) The Imperfections That Distort the Actual and Perceived Benefits That APCA Moves Yield a Potential Injurer Who Is Liable Only If Found Negligent .......................... 42 (A) Imperfections That Do Not Relate to the Resolution of Either Causation Issue, to the Resolution of the Negligence Issue, to the "Personal Responsibility" of the Injurer, or to the Various Non-AP-Cost-Related Pareto Optimal Conditions ..................... 42 (B) Imperfections That Relate to the Resolution of the Various Causation Issues ................................... 44 (C) Imperfections That Relate to the Resolution of the Negligence Issue ..... 45 (D) Imperfections That Relate to Whether the Injurer Will Bear the Cost of the Damage-Awards Assessed Against H im .................................... 46 (E) Pareto Imperfections That Distort the Private Benefits a Potential Injurer's Avoidance Will Yield Him by Distorting the Private Loss That Traditional Tort- Law Victims Sustain or the Non-AP- Cost Savings the Relevant Avoidance- M ove Generates ........................ 46 (F) Imperfections That Relate to Potential- Injurer Non-Sovereignty and Non- M aximization : .......................... 48 (G) Imperfections That Relate to the Extent to Which Tax Law and Innovation Law Internalize or Overinternalize What Would Otherwise Be the External Benefits of Production-Process A PCA R ................................ 50 (2) Three Comments on the Preceding List of Imperfections and Distortions ............... 50 1998] THIRD-BEST ALLOCATIVE-EFFICIENCY (A) The Signs of the Distortions Caused by the Listed Individual Imperfections ..... 50 (B) The Fact That the Aggregate Percentage-Distortion in the Relevant Private Benefits-%XD(PBAPcA)- XD(PBAPcA/LBgpcA)-Varies with the Type of Avoidance-Move in Q uestion ................................ 51 (C) The Aggregate Distortion in the Private Benefits of Different Types of Potential- Injurer APCA Moves Under N egligence .............................. 54 (i) Three Generalizations That Apply to the Y-D(PBAPcA)s to All Types of Potential Injurers of Avoiding Rather Than Not Avoiding ........ 54 (ii) XD(PBAPCA) for the Different Types of Avoidance-Moves Available to Potential Injurers Who Are Producers .......................... 55 (a) %YXD(PBpps) Under Negligence .................... 56 (b) %XD(Ls), %XD(pvs), %XD(uo), and %XD(PBAPCAR) for Projects Designed to Discover oPp Allocatively Efficient, Less-AP-Cost-Prone Locations and Product-Variants Under Negligence .................... 57 B. The Aggregate Distortion in the Private Cost of APCA Moves of Different Types to a Potential Injurer Who Is Liable Only If Held Negligent.. 58 (1) The Aggregate Distortion in Two Types of Private Costs AP-Cost Avoiders May Incur by A voiding ................................. 59 (A) The Aggregate Distortion in the Private Costs Potential Injurers Incur Because Their Avoidance-Moves Are Resource- Consuming (AP Costs Aside) .......... 59 (B) The Distortion in the Private Cost to Potential Injurers of Reducing the AP CHICAGO-KENT LAW REVIEW [Vol. 73:11 Costs They Generate by Reducing Their Unit Outputs ........................... 61 (2) The Aggregate Distortion in the Private Cost of the Various Types of Avoidance-Moves Available to Potentially Injurious Producers. 62 (A) The Aggregate Distortion in the Private Cost of Shifts to Less-AP-Cost-Prone Production-Processes -Y-D(PCps) ..... 62 (B) The Aggregate Distortion in the Private Cost of Shifts to Less-AP-Cost-Prone Locations or Product-Variants That Would Not Affect the Value of the Product or Service in Question to Any Consumer-Y-D(PCs) and YD(PCpvs) for Shifts That Do Not Affect Consumer Evaluation of the Producer's Services or Product (When ACE=O) ................ 63 (C) The Aggregate Distortion in the Private Cost of Shifts to Locations or Product- Variants Whose Production and Consumption Combined Generate Lower AP Costs When the Shift Does Affect Consumer Evaluation of the Producer's Services or Product- XD(PCLs) and YD(PCpvs) When ACE#O .................................. 64 (D) The Aggregate Distortion in the Private Cost of Avoiding by Reducing Unit Output or Shutting Down Altogether- YD (PC~uo) .............................. 65 (E) The Aggregate Distortion in the Private Cost of APCAR-ED(PCAPCAR) ........ 65 C. The Aggregate Percentage-Distortion in the Private Profitability of the APCA Moves of the Different Types That May Be Made by Potentially Injurious Producers Who Are Liable for the AP Costs They Generate Only If Found N egligent ....................................... 66 (1) %ED(PApps) in a Negligence Regime ...... 67 (A) %YD(Prrpps) Ignoring the Effects of M onopoly ............................... 67 1998] THIRD-BEST ALLOCATIVE-EFFICIENCY (B) The Effect of Monopoly on %XD(PTrApps) for Injurers Who Are Liable Only If Found Negligent ........ 68 (i) When (,1[PL+R]Apps)= PCApps ....... 68 (ii) When ($[PL+Rpps) <PCApps ....... 70 (iii) When ($[PL+R]Apps]) >PC&pps ...... 70 (2) %XD(PrALs) in a Negligence Regime ........ 70 (3) %XD(PrTrAvs) in a Negligence Regime ....... 71 (4) %YD(PnA1uo) in a Negligence Regime ...... 71 (5) %XD(PrTAnxAP) in a Negligence Regime .... 73 (A) ED(PlTAAPCAR) Ignoring the Effects of Monopoly, Taxes on the Margin of Income, and Knowledge-Creation Externalities ............................ 73 (B) The Effect of Monopoly, Taxes on the Margin of Income, and Knowledge- Creation Externalities on %ID(PTrAAPCAR']) .................... 74 (i) The Effect of Monopoly, Taxes on the Margin of Income, and Knowledge-Creation Externalities on %XD(PTrAAPCAR) for Projects Designed to Discover Less-AP- Cost-Prone, oPp Allocatively Efficient Production-Processes-on %YD(PTApp-APCAR) .................. 74 (ii) The Effect of Monopoly, Taxes on the Margin of Income, and Knowledge-Creation Externalities on XD(PrAAPCAR) for Projects Designed to Discover Less-AP- Cost-Prone, oPp Allocatively Efficient Locations and Product Variants-on YXD(P7TAL-APCAR) and XD(PTrAPV-APCAR) .................... 77 2. The Effect of Shifting From Negligence to Strict Liability on XD(PrAAPCA) for the Various Types of Avoidance-Moves Available to Potentially Injurious Producers and on the Amount of APCA-Related Misallocation That Such Producers Generate ......... 80 CHICAGO-KENT LAW REVIEW [Vol. 73:11 A. Thirteen Ways in Which the Non-Monopoly Distortions in PBAPCA, Perceived PBAAPCA, or Potential-Injurer Maximization Will Be Affected
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