Markets, Tort Law, and Regulation to Achieve Safety

Abstract

Markets, tort law, and regulation are alternative methods of achieving safety. Of these, the market is the most powerful, but it is often ignored in policy discussions. I show that both for the United States over time and for the world as a whole, higher incomes are associated with lower accidental death rates, and I discuss some examples of markets creating safety. Markets may fail if there are third-party effects or if there are information problems. Classic tort law is a reasonable (although expensive) way to handle third-party effects for strangers, as in the case of auto accidents. In theory, regulation could solve information problems, but in practice many regulations overreach because of different information problems — consumers are unaware of unapproved alternatives. A particularly difficult information problem arises in the case of what I call “ambiguous goods” — goods that reduce some risks but increase others (for example, medical care and malpractice.) Product liability focuses on these goods; over half of the litigation groups of the American Association for Justice are for ambiguous goods.

Increasing the price of these goods through tort liability may make consumers worse off because they are less likely to purchase more expensive goods. At least in the case of drugs both the regulatory system and the tort system are probably overly restrictive, so using both is likely to lead to net consumer harm. This factor would argue for preemption — FDA approval should preempt state tort law.

Keywords: federal regulation, tort law reform, U.S. legal system, American liability law, FDA

JEL Classification: I18