Abstract
This research relates to how excessive precaution (care) adds to the costs of accidents and in some circumstances has the unintended consequence of leading to more accidents. We argue, when too much care is taken by a firm or mandated by law, this reflects a preference for risk aversion. The cost of risk aversion by firms or governments can be spread to consumers and society, while the costs of risk aversion in individuals is internalized. A critical look at excessive care reflects how risk aversion may lead to an increase in costs, negative externalities and risk of accidents. When risk aversion leads to excessive precautions which harms society and consumers, this represents a market failure.
We evaluate excessive precaution under the Hand formula. The Hand formula is further refined to account for the marginal benefits of care, or mBmPL. To paraphrase Grady: What precautions should the potential tortfeasor not have taken but did take? In the case of excessive precaution, the costs of accidents are affected and increased risks are not fully internalized as they are passed onto other parties. Case studies related to the use of life vests in commercial airlines, the overuse of health interventions, and the overengineering of some safety precautions, illustrate how excessive care increases the costs of accidents and produces negative externalities.
There are diminishing returns from additional care being taken beyond mB=mPL. In addition to a deadweight loss associated with excessive care, in some cases, the excessive care results in additional risks of accidents for third parties. This seems counter intuitive and reflects a perverse outcome. When excessive care leads to additional accidents this frustrates the economic purpose of tort law. The effects of excessive care need to be differentiated based on the types of inefficiency they cause. Some excessive care only leads to additional transaction costs, while other excessive care leads to an increased risk of accidents. When the costs of taking care outweigh the benefits, this represents an inefficiency which increases the costs of accidents. Excessive care may increase injuries to third parties, particularly when the additional care costs include consumption of finite resources or produce negative externalities. Wasted resources used on excessive care can be reallocated to cost effective care measures for unaddressed risks. This reflects how a concentration of care efforts may occur when risks are diffused.
The law should promote the taking of efficient care by discouraging the taking of less than due care and taking excessive care. In this sense, the law should promote the “just right” level of care taking. This problem cannot always be solved through traditional liability or property rules. Some potential solutions include regulation which sets a standard of mB=mPL for care taking, no more and no less, and enabling consumer claims related to the passed-on costs of excessive care. These solutions may be difficult to implement due to the presence of high transaction costs and government inertia.
Consider the economic view that “the primary reason for utilizing the tort system is to allow risk-creating activities to be carried out only if the social value of the activity justifies the risk created.” When excessive precaution represents a risk-creating activity the law should intervene. In the case of excessive care, the law should limit this risk averse and wasteful practice when it has a negative economic impact on society and consumers.
We evaluate excessive precaution under the Hand formula. The Hand formula is further refined to account for the marginal benefits of care, or mB
There are diminishing returns from additional care being taken beyond mB=mPL. In addition to a deadweight loss associated with excessive care, in some cases, the excessive care results in additional risks of accidents for third parties. This seems counter intuitive and reflects a perverse outcome. When excessive care leads to additional accidents this frustrates the economic purpose of tort law. The effects of excessive care need to be differentiated based on the types of inefficiency they cause. Some excessive care only leads to additional transaction costs, while other excessive care leads to an increased risk of accidents. When the costs of taking care outweigh the benefits, this represents an inefficiency which increases the costs of accidents. Excessive care may increase injuries to third parties, particularly when the additional care costs include consumption of finite resources or produce negative externalities. Wasted resources used on excessive care can be reallocated to cost effective care measures for unaddressed risks. This reflects how a concentration of care efforts may occur when risks are diffused.
The law should promote the taking of efficient care by discouraging the taking of less than due care and taking excessive care. In this sense, the law should promote the “just right” level of care taking. This problem cannot always be solved through traditional liability or property rules. Some potential solutions include regulation which sets a standard of mB=mPL for care taking, no more and no less, and enabling consumer claims related to the passed-on costs of excessive care. These solutions may be difficult to implement due to the presence of high transaction costs and government inertia.
Consider the economic view that “the primary reason for utilizing the tort system is to allow risk-creating activities to be carried out only if the social value of the activity justifies the risk created.” When excessive precaution represents a risk-creating activity the law should intervene. In the case of excessive care, the law should limit this risk averse and wasteful practice when it has a negative economic impact on society and consumers.