Does Product Liability Make Us Safer?

April 10, 2012

Tort law for product injuries is a rational response to a market failure; namely, consumers lack the necessary information in order to make an informed choice about product risks.  The fear of tort cases, therefore, would ideally cause firms to internalize the costs of possible injuries and create efficiently safer products.  However, a number of factors in the contemporary system compromise this goal, says W. Kip Viscusi of Vanderbilt University.

First, jurors deciding tort cases have a distasteful attitude toward the rational firm response to measure and manage risks.

  • Firms recognize that product safety is in fact a luxury that, if it is to be a component of the eventual product, will bring with it additional costs.
  • Firms must therefore weigh additional costs against the consumer preference for additional safety.
  • Jurors, however, fail to appreciate the fact that all consumers enjoy lower prices and focus exclusively on the conscientious decision on the part of the firm to allow certain risks.
  • This point is further accentuated by the need for firms to be able keep product prices low in order to be able to compete in a capitalistic environment.
  • Thus, firms often find themselves punished with greater-than-efficient torts for giving consumers exactly what they desire.

Second, researchers have shown that tort payments at certain levels may have the unintended effect of limiting the creation of new products altogether.  While low-to-moderate product liability costs were shown to encourage greater safety standards for products, costs at the high end resulted in the conscious decision to stop innovating for fear of future torts.

Third, a particularly burdensome component of the American tort system is punitive damages awarded to injured parties that impose extreme penalties that cannot be predicted.  This causes the above-mentioned phenomenon of strangling innovation altogether.

  • As of 2008 there had been 100 punitive awards allowed by the tort system, defined as financial amounts that reached or exceeded the $100 million threshold.
  • The industry that has been most harshly punished by punitive damages is the cigarette industry, with has faced more than $10 billion in charges from five separate settlements (and this excludes the famous Engle settlement that was much larger).
  • Additionally, jurors lack any fundamental guidance on what punitive damages are appropriate, making penalties unpredictable and arbitrary.

Source: W. Kip Viscusi, "Does Product Liability Make Us Safer?" Regulation, Spring 2012.

For text:

http://www.cato.org/pubs/regulation/regv35n1/v35n1-4.pdf

 

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