The economic analysis of legal rules has included intensive study of the "unilateral accident model" in which the actions of one person (a "tortfeasor") potentially cause harm to another, but in which the compensation (if any) paid by the tortfeasor to the victim depends on the choice of legal rules (tort law) and the precautions the tortfeasor had taken to avoid the accident. The model assumes that victims are unable to alter the probability of an accident. Users are able to set the threshold for liability, the threshold for punitive damages liability, the amount of damages, the amount of punitive damages, and the shape of the accident probability function. The red vertical dashed line represents the punitive damage threshold. If and only if the tortfeasor incurs less than this level of accident avoidance costs, the tortfeasor is liable for punitive damages.
The orange vertical dashed line represents the liability threshold. If and only if the tortfeasor incurs less than this level of accident avoidance costs, the tortfeasor is liable (at least) for conventional damages. The thick blue line represents the total cost facing the tortfeasor: accident avoidance costs plus expected liability. The green dashed lines represent the projection of the optimum (total cost minimizing) accident avoidance amount onto the total accident cost curve and onto the corresponding point on the total accident costs axis. The very faint thin blue line is what the total cost of accidents would be if strict liability were in place and if no punitive damages existed. It is often useful as a reference. The red line is simply the cost of accident avoidance. The accident probability exponent determines the rate at which the probability of an accident diminishes as the care of the tortfeasor increases.