Liability

Abstract

If the damage potentially associated with a risk manifests itself, liability rules place the injured party in a position to claim compensation from the party responsible for the damage suffered (post-event compensation function). Moreover, the person undertaking the risky activity is thus made responsible for the potential negative consequences of that activity. By internalizing the damage at the party responsible, prevention and safety measures are thus in that party’s own best financial interest (damage prevention function). The prevention function has two aspects: for one thing, liability — be it based on or regardless of fault — creates incentives for a responsible party to make use of available knowledge about prevention options and possible damaging effects. The second aspect is that liability — particularly strict liability, i.e. regardless of fault — creates incentives to generate new knowledge about prevention options and previously unknown damaging effects, as this knowledge can be used to reduce the responsible party’s costs.