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Uncertain Causation, Regulation, and the Courts

Law-and-economics suggests principles for deciding how best to allocate rights, duties, and legal liability for actions that cause harm or that fail to prevent it. The same principles can be applied to suggest how to coordinate the overlapping activities of regulators and the courts in constraining and penalizing individual behaviors and business activities in an effort to increase net social benefits. This paper reviews law-and-economics principles useful for benefit-cost analysis (BCA) and judicial review of regulations and public policies; highlights the crucial roles of causation and uncertainty in applying these principles to choose among competing alternatives; and discusses how net social benefits can be increased by applying these same principles to judicial review of regulations that are based on uncertain assumptions about causation of harm. Real-world examples of air pollution regulation and food safety regulation illustrate that deference by the courts (including administrative law judges) to regulators is not likely to serve the public interest when harmful effects caused by regulated activities are highly uncertain and are assessed primarily by regulatory agencies. In principle, responsibility for increasing net social benefits by insisting on rigorous analysis of causality and remaining uncertainties by both plaintiffs and defendants should rest with the courts. In practice, failure of the courts to shoulder this burden encourages excessive regulation that suppresses socially beneficial economic activities without preventing the harms or producing the benefits that regulators and activists project in advocating for regulation. Stronger judicial review of regulations by courts that require sound and explicit reasoning about causality from litigants is needed to reduce arbitrary and capricious regulations, meaning those in which there is no rational connection between the facts found and the choice made, and to promote the public interest by increasing the netbenefits from regulated activities.