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Tuesday, October 31, 2006


Assessing the Damages

There is an editorial in the New York Times today discussing the issue of punitive damages. The Supreme Court is currently hearing a case involving this issue between Phillup Morris and the damages to be awarded to the widow of a smoker. Phillup Morris brought the case to the Supreme Court because they believe the award is excessive including "more than $821,000 in actual damages and $79.5 million in punitive damages." These damages were awarded as a result of 'negligence' on the part of the cigarette company. Additionally, according to the Oregon Supreme Court, the company's "deceit thus would, naturally and inevitably, lead to significant injury or death."
Even if Phillup Morris is still found to be accountable for the husband's death, the question of how much should be paid is still debatable. The Supreme Court has already found that due process is violated if punitive damages are too high. The author of this article believes the damages awarded are not too high and calls into question the limitations previously placed on the amount of punitive damages by the Supreme Court. A few years ago, the court said that punitive damages should be in a '"single digit ratio to actual damages." For example if the damages were found to be around $500,000 the punitive damages should not exceed $5 million. The author contends that "Constitutional principles can seldom be boiled down to a formula and it is difficult to see why the court should rein in juries so tightly."
The author is failing to consider economic analysis in his answer. Economics contends the purpose of punitive damages in the end is efficiency- this is the primary goal and in order to achieve this one should be charged an amount equal to the damage done. If the amount is too high, efficiency will not be attained. In addition, using legal rules to redistribute wealth usually causes inefficiency. Courts should take into account estimated human capital such as future income, pecuniary damages and sometimes hedonic damages which is where most of the grey area lies because it involves putting a price on life. Putting a price on life is a task many are not willing to take because it involves a large amount of equity and subjective judgements because what one's life is worth to someone may not necessarily be the case to another. One would also need to calculate the compound interest and the rate one should use is also subject to debate because one cannot accurately predict what the future interest rate is going to be. There are many subjective judgements involved in calculating damages using economics but there are definite formulas and amounts exceeding what could reasonably be used in the formulas would not promote efficiency.
Punitive damages are a necessary part of both our economic and legal system. Punitive Damages exist in an effort to ensure individuals and companies are conducting themselves in a way that will cause little harm to others. Or economically speaking they would at least be willing to adequately compensate for such harm making the other party 'whole' again or internalizing the externality.

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