Research Handbooks in Law and Economics series
Edited by Jennifer H. Arlen
The “new” economic analysis of law began with the economic analysis of torts—with the early analyses focusing on questions such as when does the law need to intervene to internalize externalities (Coase 1960), when should intervention occur through liability rules (Calabresi and Melamed 1972), and what is the optimal structure of liability (e.g.,Shavell 1980a; Landes and Posner 1987). The original economic models of torts tried to provide an economic framework for analyzing accidents that could be applied generally. The resulting simple and elegant models tended to focus on accidents involving one injurer and one victim operating in a world of perfect information, optimal courts, no litigation costs and no insurance. In this world, tort liability is an effective mechanism for inducing optimal investments in care by both injurers and victims when liability is needed to internalize costs, as it is for accidents involving strangers (Calabresi and Melamed 1972; Shavell 1980a; see Landes and Posner 1987) or customers who cannot observe the quality of the goods or services they are purchasing (Spence 1977). Moreover, negligence liability is both effective and low cost. The mere threat of negligence liability is sufficient to induce due care.