As we have seen so far, liability rules can be regarded as cost-allocation rules between injurers and victims. A rule of comparative negligence allocates the cost of harm between the parties in proportion to the contribution of negligence to the accident. For example, if the victim's negligence is 20 per cent responsible for the accidental harm, then the victim may only recover 80 per cent of damages from the injurer.
This rule requires the court to:
- 1. Define a due standard for the injurer, z;.
- 2. Define a due standard for the victim, zv.
- 3. Compare the actual levels of care, xt and xv, with the due standards zt and zv.
- 4. Compute the percentage contribution of each party's negligence to the accident.
Let b(xt, xv) be the 'blame function': percentage contribution of damages borne by the injurer when the injurer takes care xi and the victim takes care of xv. Then, we have:
When both parties meet their due standards, this blame function is not defined. To deal with this case, let:
It is straightforward to show that if the due standards of care are set at the efficient levels, then the Nash equilibrium under this legal rule involves both parties choosing the efficient level of care, with injurers avoiding liability and harm falling on the victim. In a non-market setting, a comparative negligence rule is efficient.
What about comparative negligence in a market setting? Since injur- ers avoid liability, they do not face the full social marginal costs of their actions, and so produce an inefficiently high amount, Q™ > Q*.
On the other hand, firms in industry v will have marginal and average costs of:
To minimise these costs, each firm in industry v will choose care up to the point where:
Since Qcn > Q*, firms in industry v will choose a level of care that is inefficiently high. This will mean that Q™ < Q*.