Negligence and insufficient activity: the missing paradigm in torts.

• Author: Gilo, David

Conventional wisdom in tort law maintains that the prevention of undesirable risks mandates restriction of harmful conduct. Against this widely held conviction, this Article shows that undesirable risks often stem from insufficient, rather than excessive, activity. Because negligence requires investments in only cost-justified care, parties might deliberately limit their activity so that the size of the ensuing risk would be lower than the cost of welfare-enhancing precautions. Parties' incentives to strategically restrict their activity levels have striking implications for the inducement of efficient harm prevention. The overlooked paradigm of insufficient activity calls for the imposition of a new form of tort liability, justifies the application of controversial regulatory rules recently challenged before the Supreme Court, and supports overturning the standard guidelines concerning the choice between negligence and strict liability.

TABLE OF CONTENTS INTRODUCTION I. THE CONVENTIONAL PARADIGM: OPTIMAL CARE AND EXCESSIVE ACTIVITY A. Reasonable-Behavior Standards and the Incentives for Excessive Activity B. Normative Implications of Excessive Activity Levels 1. Maximum-Activity Regulation 2. Negligence, Strict Liability, and "The Lesser of Two Evils" Principle II. THE OVERLOOKED PARADIGM: SUBOPTIMAL CARE AND INSUFFICIENT ACTIVITY A. The Risk of Insufficient Activity--An Illustration B. The Prerequisites for Insufficient Activity C. The Risk of Insufficient Activity in Practice 1. Cost-Benefit Analysis in Negligence Cases 2. Regulatory Thresholds and Strategic Activity Levels III. INDUCING OPTIMAL PREVENTION AND MINIMIZING THE Loss FROM INSUFFICIENT ACTIVITY LEVELS A. Applying the Negligence Standard to Insufficient Activity 1. Liability for Insufficient Activity 2. Objections: Liability for Nonfeasance and Parties' Autonomy B. Regulations and Efficient Activity Levels C. Insufficient Activity: Negligence v. Strict Liability Reconsidered. CONCLUSION APPENDIX INTRODUCTION

Harm prevention, as tort literature has long shown, may take two forms. First, potential risks can be reduced by investments in care. For example, drivers may decrease the likelihood of accidents by driving more slowly; railroad companies can lessen the possibility of setting crops on fire by installing spark arresters; and factories can reduce pollution by using filters. Second, since investments in care may not entirely eliminate the risk of harm, drivers, railroad companies, and factories can also reduce risks by lowering the level of their activities. (1) Less driving, for example, just like careful driving, diminishes the probability of car accidents. In an ideal world, therefore, tort law rules would induce parties to behave optimally with respect to levels of both care and activity. (2)

Legal scholarship, however, has shown that in practice tort law often provides incentives only for optimal care. (3) In a typical lawsuit for negligent driving, for example, courts usually explore the extent to which the defendant-driver took reasonable precautions (level of care). They do not, however, investigate whether the defendant's mileage (level of activity) corresponds to the socially desirable level. (4) A defendant who drives at an unreasonable speed may well be found negligent. In contrast, a defendant who avoids speeding--but whose driving provides little social benefit, thus creating unnecessary risk--will likely avoid any liability. (5) Defendants will therefore avoid speeding, but drive even when the expected harm they inflict on others outweighs their own benefit. (6)

More generally, legal theory has argued that parties subject to reasonable-behavior regimes (such as negligence) will make efficient investments in precautions, but then overengage in their conduct. As Professor Steven Shavell has recently argued, under the negligence standard, "injurers will be led to take optimal care." (7) Thus, under the negligence standard, "injurers will escape liability for any accident losses they cause. They will therefore have no reason to consider the effect that engaging in their activity has on accident losses. Consequently, injurers will be led to choose socially excessive activity levels." (8) Applying this analysis, scholars have demonstrated the risk of parties engaging in excessive activity across different tort-related areas. (9)

This Article, however, suggests that the existing view concerning the effects of negligence on parties' behavior is incomplete. It shows that while courts' adjudication and scholars' analyses have focused on the risk of optimal care and excessive activity levels, they have overlooked the parallel problem of suboptimal care and insufficient activity levels. Because the risk of harm usually increases together with more activity, maintaining a low level of activity may allow parties to escape a duty to invest in precautions. When their benefit from more activity is smaller than the costs of such precautions, parties are likely to restrict their activity even when a higher activity level and greater care are more socially desirable. Against the conventional paradigm, therefore, this Article demonstrates that under reasonable-behavior standards parties might deliberately set their activity below (rather than above) the socially desirable level while avoiding efficient care.

To illustrate, consider the case of a polluting factory. In line with the conventional paradigm, a leading tort scholar has recently concluded that "[n]egligence law may be fairly good at examining whether the plant is designed and maintained in a cost-effective fashion." (10) However, since "courts may be unable to assess whether the scale of the plant is excessive in a social sense," the factory is likely to overengage in its activity. (11) Once the factory invests in optimal care and faces no risk of liability, so the argument goes, it will increase its level of production even when its benefit from such an increase is lower than the expected cost of pollution. (12)

Against this backdrop, consider the following hypothetical. Assume that a factory may choose between different levels of production and may invest in precautions that would eliminate any possible harm. Assume that the costs of precautions do not depend on the level of production. For example, suppose that the above-mentioned factory can avoid any pollution by elevating its smokestack at a cost of $120. Suppose also that the factory can choose between engaging in a low activity level or a high activity level. In the low activity level, the factory's profits will be $1000, and the harm inflicted on nearby residents will be $110. In the high activity level, where the factory produces more, its profits will increase to $1100, but the harm inflicted on nearby residents will increase to $130.

Under a negligence regime, applying the Hand formula, the factory would be liable if it could prevent the harm by investing in cost-effective precautions. (13) In the low activity level, the loss to residents ($110) is smaller than the cost of elevating the smokestack ($120). In the low activity level, therefore, the factory is neither required to raise its smokestack nor is it required to compensate the residents. Consequently, since it will not bear any costs for precautions or liability, the factory's benefit while operating at low activity will be $1000. In contrast, in the high activity level, the harm to the residents ($130) outweighs the costs of precautions ($120). Looking to avoid paying $130 in damages, the factory must invest $120 in elevating its smokestack. Thus, when operating at high activity, the factory's benefit includes its profits from production ($1100) less its costs of elevating the smokestack ($120), for a total of only $980. Looking to maximize its payoff ($1000 > $980), the factory would therefore set its activity at the low level.

Maximization of social welfare, however, mandates that the factory produce at the high level and also invest in elevating its smokestack. At low activity--where the factory has no duty to invest in precautions and harm materializes--the net social benefit equals $890 (the factory's $1000 profits from production less the $110 harm to the residents). By contrast, if the factory operates at high activity--where investments in prevention are made and the residents incur no harm--the net social benefit reaches $980 (the factory's $1100 profit from the increased production less the $120 cost of the smokestack). (14)

While courts and scholars have emphasized parties' incentives to optimally invest in precautions and engage excessively in activities, the polluting-factory hypothetical demonstrates that the risk of inefficient behavior might be in the opposite direction. Negligence-based regimes may induce parties to engage too little in a socially desirable activity and forgo investments in efficient prevention. Looking to avoid a duty of care, parties may strategically restrict their activity below the socially desirable level so that the magnitude of the ensuing risk will be lower than the costs of welfare-enhancing precautions. As the following analysis shows, the risk of such conduct may arise under various contingencies and in a wide set of cases.

The overlooked paradigm of insufficient activity and suboptimal care has important normative implications. Conventional legal scholarship, addressing the risk of inefficient activity levels, has proposed several recommendations as to the design of regulations and the choice between liability regimes. (15) It has thus claimed to provide both legislatures and courts with clear guidelines for inducing optimal prevention. Yet, given the literature's focus on the risk of excessive conduct, it has failed to consider parties' possible incentives to undesirably limit their activity. This Article, aiming to rectify this gap, reassesses the conventional recommendations and elaborates on the ways in...