Chapter 2

1. Discuss the manner in which tort law internalizes externalities. What are its advantages and disadvantages compared to government regulation?

2. Courts in tort cases, when deciding on compensation, are not allowed to consider evidence about a victim’s income or whether or not she has insurance to cover her injuries. Does this rule make economic sense?

3. Discuss the following quote:

As a theoretical matter, the systems of strict liability and negligence begin from opposite points of view. The basic question with a system of strict liability always takes the form, is it fair to let one party gain an advantage at the expense of the other. The negligence system tends to ignore the relationship between the parties and asks only of each taken in isolation, is there any reason to believe that he should not have acted as he did, where the harm that ensues is itself never taken as that reason. (Richard Epstein (1980) A Theory of Strict Liability, The Cato Institute, p. 133.)