Originally created 01/08/01

Brauer: Law, economics share cost models



What do economics and law have to do with each other? A lot, actually.

There is law, and there are law breakers. People break laws because the benefit to them is greater than the cost which, on average, is the probability of being caught times the size of the punishment.

If the probability of being caught speeding is zero, we would expect a corresponding rise in accidents and increased cost to victims.

But if the probability of being caught is 100 percent, that is also costly because society must pay for a policeman at every street corner.

Neither extreme is acceptable. There must therefore be some optimal level of law breaking.

Consider car accidents as another example. The one causing the accident must pay the cost. But who causes the accident when I run you over? That I will run you down depends not only on my precautions while driving but also on yours while walking.

If I am strictly liable to pay the cost of the accident (to "make you whole" again), then you have no incentive to be cautious, thereby increasing the likelihood of an accident, and it seems wrong for me to be liable for your lack of precaution.

Thus, economics teaches us that strict liability is not a good rule of law to follow in this case.

What would be a good rule to follow? One is the rule of negligence. I am liable only if I am negligent. This will induce me, the driver, to take all cost-justified precautions but it will also induce you, the pedestrian, to take all cost-justified precautions because you now cannot be sure that you will collect damages from me if you are found negligent.

But the problem with this solution is that a court must now decide what constitutes cost-justified precautions and what constitutes negligence. It must also decide how to observe whether or not you and I took all precautions, an obvious impossibility. The story continues, but would carry us too far here.

The point is that economics - thinking about behavior in terms of incentives, of benefits and costs - encourages us to ask useful questions.

David Friedman, an economist and law professor, from whom the examples are taken, once lived in New York City. He had an argument with a friend about how to prevent criminals from mugging pedestrians.

Mr. Friedman was in the habit of taking a 4-foot walking stick with him on every outing. The friend argued that this would only attract macho muggers wanting to show off.

But Mr. Friedman argued that even muggers are "rational," understanding it is easier to mug a little old woman at zero cost of resistence than to mug someone with a 4-foot stick. Even muggers want to minimize costs and maximize their loot.

Hence, muggers go for easy targets, just as lions tend to hunt zebras, not leopards.

This reasoning applies to protecting your home as well. A little protection is better than none. On average, thieves are more likely to scout and pick the easy homes first.

Leaving a large dog dish and waterbowl and a large rubber bone lying around in the back yard are cheap ways of signaling to scouts that your home is protected.

On average, Mr. Friedman argues, a thief is likely to move on to a less ominous place. Still, I am glad I have two real dogs in my yard and home.