What Do Economists have to Say About Liability?

What Do Economists have to Say About Liability?

What Do Economists have to Say About Liability? 150 150 Avalon Health Economics LLC

Most are familiar with the economics subfield referred to as “Law and Economics.” The subfield of Law and Economics is where economic concepts are applied to (and overlap with) issues of public policy, regulation, contracts, environmental policy, health and safety policy, and related fields in which the specifics of laws and statutes have implications for economic theory and analysis. But what is less commonly known is that it is in this overlap where economists often need to consider issues related to liability. This is especially the case in the economic theory of “externalities,” which is a commonly relied upon theoretical construct and analytic framework used in economics, health economics, public health, and environmental health.

It is also a commonly relied upon concept in the economics subfield Law and Economics. For example, to undertake an analysis of the magnitude and effect of a negative externality like pollution or contamination, it is necessary to develop a complete understanding of the sources of the pollution, and (by extension) the specific entities responsible for those sources. The latter is especially important in determining optimal mitigation and abatement strategies, which in some cases economists are also asked to perform. Thus, economists are generally accustomed to considering aspects of liability for the purposes of assigning responsibility in issues regarding externalities and inefficiencies, and further applying those concepts to the design of mechanisms to mitigate and abate attributable costs.[1] This has direct implications in, for example, product liability, where one party’s degree of liability is in some cases a function of the liability of all other “potentially responsible parties.”[2]

(By John E. Schneider, PhD) (2023)

1) For a more detailed account of how economists approach liability, see generally R.D. Cooter, “Economic Theories of Legal Liability,” Journal of Economic Perspectives 5, no. 3 (1991).

2) For example, “CERCLA” (commonly referred to as the “Superfund” laws) states that liability should be allocated in a “fair and reasonable” way (e.g., based on volumetric data, if available or applicable) such that abatement costs can be shared among potentially responsible parties.