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Drivers, Doctors, and Liability Externalities

Abstract

According to legal principles, a driver who negligently breaks a pedestrian’s leg should pay the same damages as a doctor who negligently breaks a patient’s leg. According to economic principles, however, the driver should pay more than the doctor. Drivers should pay more than doctors who inflict the same harm because of externalities in the underlying activites. Non-negligent drivers impose risk on others and liability law does not make them pay for it. When liability externalities are negative as with driving, socially efficient damages should increase beyond full compensation in order to discourage the activity. In contrast, doctors create benefits for patients that exceed their fees. When liability externalities are positive as with doctoring, damages should decrease below full compensation in order to encourage the activity. In general, law should adjust damages up or down according to the externality associated with the underlying activity. Instead of case-by-case adjustment, law should refine the menu of available damage measures and associate different measures with different activities. The menu should include a novel measure -- disgorgement damages for accidents.

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