Nearly 80 years ago, Judge Learned Hand issued his famous decision in U.S. v. Carroll Towing Co. While teaching a Law and Economics class recently, a student thought I (Horowitz) was joking when I mentioned “Judge Learned Hand.” I brought up his biography, and to the class’s amusement, he was, in fact, a real person with a remarkably appropriate name. Judge Hand proposed that negligence depends on whether the burden of taking precautions (B) is smaller than the probability of harm (P) multiplied by the expected loss (L). If B < P × L, then failing to take precautions is negligent. The Hand formula explicitly framed negligence as a cost–benefit calculation and remains one of the clearest examples of economic reasoning embedded in legal doctrine. 

A tort is an act or omission that causes harm to people or property. Economists studying tort law consider how liability rules shape behavior, risk-taking, and social well-being. Tort law governs accidents, negligence, product defects, and other situations in which one person or organization harms another. Typically, an injurer, such as a driver, firm, or doctor, causes harm to a victim, such as a pedestrian, consumer, or patient.  

Judge Guido Calabresi argued that accident law should be designed to minimize total social costs. These costs include injuries and property damage, the costs of preventing accidents, and the administrative expenses of legal processes. The goal of tort law is not to eliminate all accidents but to achieve the optimal level of safety, where the combined costs of harm and prevention are minimized. 

Steven Shavell distinguished between unilateral and bilateral accidents. In unilateral accidents, only the injurer can reduce risk, for example, a factory explosion or a surgical mistake. In such cases, strict liability and negligence often produce similar levels of precaution. In bilateral accidents, both parties can reduce risk. A driver can slow down, and a pedestrian can look both ways. Here, negligence rules tend to work well because they encourage both sides to act carefully. 

Different liability rules create different incentives. Under strict liability, injurers pay for all harm they cause, giving them strong incentives to reduce risk, though victims may take less precaution. Under negligence rules, injurers pay only if they fail to meet a standard of due care. When that standard is set properly, both injurers and victims are encouraged to take efficient precautions. Economics emphasizes that societies face trade-offs. It is not surprising these insights are embedded in our legal system.