One of the chapters in ‘Law and Economics,’ edited by Satish K. Jain (www.oup.com), is titled ‘Taxes and legal rules for the control of externalities when there are strategic responses’ by John Prather Brown and William L. Holahan. The 1980 paper is about the economics of accidents. Tort rules of liability allow accident victims to go to court to try to collect damages from the harming party, it begins.
“Where there are large numbers of participants both as potential plaintiffs and as potential defendants, then the Cournot-Nash equilibrium resulting from non-strategic behaviour is a very plausible model. However, there are many tort contexts that are one-on-many or one-on-a-few or one-on-one in character where strategic behaviour by the one is plausible and worthy of study,” the authors explain.
While that can be an independent subject of study for novices, it should be interesting to know about suggestions of possible substitutes to traditional tort law, such as Pigou’s idea of taxes to raise marginal private costs to the level of marginal social costs so that private parties will have incentives to cut back the offending activity to the appropriate level.
However, the authors conclude by stating that the Pigovian tax, with victim indemnification, is not robust with respect to lower transaction costs; and that ‘zero transaction costs allow trade from the inefficient equilibrium to the social-cost-minimising point.’
For avid researchers.