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Getting Incentives RightImproving Torts, Contracts, and Restitution$
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Robert D. Cooter and Ariel Porat

Print publication date: 2014

Print ISBN-13: 9780691151595

Published to Princeton Scholarship Online: October 2017

DOI: 10.23943/princeton/9780691151595.001.0001

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Liability Externalities and Mandatory Choices

Liability Externalities and Mandatory Choices

(p.165) 10 Liability Externalities and Mandatory Choices
Getting Incentives Right

Robert D. Cooter

Ariel Porat

Princeton University Press

This chapter introduces the general theory of liability externalities and applies it to mandatory choices. “Liability externality” refers to costs and benefits conveyed to others that market prices do not capture and liability law does not correct. In these circumstances, adjusting liability can improve incentives. The contrast between doctoring and driving illustrates the difference between actual and ideal law. According to actual law, a doctor who negligently breaks a patient's leg has the same liability as a driver who negligently breaks a pedestrian's leg. Ideally, however, the doctor's liability should be less than the driver's liability. The chapter considers suitable circumstances for applying the general theory of liability externalities, given limited information available to courts. It also discusses disgorgement damages for risk of accidents and the equalization principle, which states that the difference in expected social harm between mandatory alternatives should equal the difference in the actor's liability.

Keywords:   liability externalities, mandatory choices, liability, incentives, disgorgement damages, accidents, equalization principle, social harm

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