The original description of the calculus was in United States v. Carroll Towing Co.,[1] in which an improperly secured barge had drifted away from a pier and caused damage to several other boats.
Hand stated: [T]he owner's duty, as in other similar situations, to provide against resulting injuries is a function of three variables: (1) The probability that she will break away; (2) the gravity of the resulting injury, if she does; (3) the burden of adequate precautions.This relationship has been formalized by the law and economics school as such: an act is in breach of the duty of care if: where B is the cost (burden) of taking precautions, and P is the probability of loss (L).
The tort system acts as if, before the injury or damage, a contract had been made between the parties under the assumption that a rational, cost-minimizing individual will not spend money on taking precautions if those precautions are more expensive than the costs of the harm that they prevent.
If precautions were not taken, we find that a legal duty of care has been breached, and we impose liability on the individual to pay for the harm.
This approach, in theory, leads to an optimal allocation of resources; where harm can be cheaply avoided, the legal system requires precautions.
Critics point out that term "gravity of loss (L)" is vague, and could entail a wide variety of damages, from a scratched fender to several dead victims.
[3] Human teams estimating risk need to guard against judgment errors, cf.
In the U.S., juries, with guidance from the court, decide what particular acts or omissions constitute negligence, so a reference to the standard of ordinary care removes the need to discuss this conceptual formula.
Juries are not told this formula but essentially use their common sense to decide what an ordinarily careful person would have done under the circumstances.
One famous case of abuse by industry in recent years related to the Ford Pinto.
First, to more accurately model customer acceptance and process reliability to produce wanted outcomes.
Reasonable signs warning of the risk before persons reach the cliff may actually be more effective in reducing fatalities than the rail itself.
[5] For example, in Haris v Bulldogs Rugby League Club Limited [10] the court considered the social utility of holding football matches when determining whether a football club took sufficient precautions to protect spectators from the risk of being struck by fireworks set off as part of the entertainment during a game.