The Uneasy Case for Product Liability

Abstract:     
We explain in this Article that the benefits of product liability may well be outweighed by its costs in a wide range of circumstances. One benefit is that the threat of liability may induce firms to improve product safety. However, this benefit is limited: even in the absence of product liability, firms would often be motivated by market forces to enhance product safety because their sales are likely to fall if their products harm consumers; moreover, their products must frequently conform to safety regulations. Consequently, product liability might not be expected to exert a significant additional influence on product safety - and the available empirical evidence suggests that such liability does not in fact have a measurable effect on the frequency of product accidents. A second benefit of product liability is that it causes product prices to increase to reflect the riskiness of products and thereby may improve consumer purchase decisions. But this benefit also involves a detriment, because product prices may rise excessively and undesirably chill purchases. A third benefit of product liability is that it compensates victims of product-related accidents for their losses. Yet this benefit is only partial, for accident victims are already often compensated by their insurers for some or all of their losses. Potentially offsetting the benefits of product liability are its costs, which are great. To transfer a dollar to a victim of a product accident requires more than a dollar on average in legal expenses. Given the limited benefits and the high costs of product liability, we conclude that it may be socially undesirable - especially for widely sold products, with respect to which market forces and regulation are relatively strong. This judgment is in tension both with the broad social endorsement of product liability and with proposals for its reform, which generally do not question its existence. Our more critical assessment of product liability stems from the fact that we engage in an analysis of its benefits and costs, whereas neither the proponents of product liability nor its reformers undertake to do so.

JEL Classifications: K13

Accepted Paper Series