In order to create optimal incentives, liability rules need to induce parties to minimize the total social cost of accidents The relevant variables for this tort problem are the cost of accidents, the cost of accident avoidance(precaution) and the administrative costs of the justice system. Every legal system chooses from various liability rules(e.g, negligence, strict liability, etc. )and safety standards to minimize the overall cost of accidents The goals of tort law A first intuitive end of tort law is to compensate the victims for losses due to accidents. This is indeed an important task of tort adjudication but is not the central issue concerning the design of tort rules. It has been shown that tort law is a very expensive means of compensating harms, because it involves high dministrative cost due to the functioning of the judicial system. Insurance, to the contrary, is a much cheaper and quicker system(Shavell, 1987, at 263 ):if the only goal were to compensate victims, first-party insurance would be preferable over tort liability. Moreover, the cost of insurance can be paid by the potential injurers, shared among potential victims or financed by taxpayers, in order to redistribute the costs(McEwin, 2000) On the contrary, economic analysis suggests that the primary reason fo utilizing the tort system is to allow risk-creating activities to be carried out only if the social value of the activity justifies the risk created. This balancing of costs and benefits is currently endorsed by North American tort doctrine and is clearly summarized by the Restatement( Second)of Torts$ 291:"Where an act is one which a reasonable man would recognize as involving a risk of harm to another, the risk is unreasonable and the act negligent if the risk is of such magnitude as to outweigh what the law regards as the utility of the act or of the2 In order to create optimal incentives, liability rules need to induce parties to minimize the total social cost of accidents. The relevant variables for this tort problem are the cost of accidents, the cost of accident avoidance (precaution), and the administrative costs of the justice system. Every legal system chooses from various liability rules (e.g., negligence, strict liability, etc.) and safety standards to minimize the overall cost of accidents. 1. The goals of tort law A first intuitive end of tort law is to compensate the victims for losses due to accidents. This is indeed an important task of tort adjudication but is not the central issue concerning the design of tort rules. It has been shown that tort law is a very expensive means of compensating harms, because it involves high administrative cost due to the functioning of the judicial system. Insurance, to the contrary, is a much cheaper and quicker system (Shavell, 1987, at 263): if the only goal were to compensate victims, first-party insurance would be preferable over tort liability. Moreover, the cost of insurance can be paid by the potential injurers, shared among potential victims or financed by taxpayers, in order to redistribute the costs (McEwin, 2000). On the contrary, economic analysis suggests that the primary reason for utilizing the tort system is to allow risk-creating activities to be carried out only if the social value of the activity justifies the risk created. This balancing of costs and benefits is currently endorsed by North American tort doctrine and is clearly summarized by the Restatement (Second) of Torts § 291: “Where an act is one which a reasonable man would recognize as involving a risk of harm to another, the risk is unreasonable and the act negligent if the risk is of such magnitude as to outweigh what the law regards as the utility of the act or of the