Products Liability

Products Liability

Description

Designing the products liability system to promote efficiency is justifiable because the injurer (seller) and victim (consumer) typically are in a contractual relationship. Contracting will not lead to efficient outcomes when consumers undervalue the benefits of seller liability, as would occur, for example, when consumers underestimate product risk. Although tort liability often would reduce product risk in these situations, forcing sellers to pay for product-caused injuries is likely to increase the average cost of injury compensation. This tension between safety and insurance considerations makes it difficult to reach firm conclusions regarding the efficiency properties of the main products liability doctrines. Nevertheless, in many instances the legal rules do not depend upon the relevant economic considerations, suggesting that the current system could be made more efficient. Products liability—the body of law governing the allocation of losses caused by product use—has rapidly gained prominence over the past 50 years. The importance of products liability stems from the substantial social cost of product-caused injuries. According to government data, product accidents in the United States cost roughly $50 billion per year. These data are crude, however. Relying on survey evidence, Hensler et al. estimate that accidents in the United States, excluding those resulting in latent injuries, institutionalization, or death, impose direct and work-loss annual costs of $175.9 billion or 4 percent of Gross National Product. Approximately 30 percent of these accidents involved product use, and another 18 percent were associated with motor-vehicle use. The social cost of nonfatal product accidents is substantial, then, and including fatalities and latent injuries (like those caused by exposure to toxic substances) considerably increases the total. The magnitude of these losses and the volume of product transactions indicate that products liability rules have a significant impact on producers, consumers, and the general economy. Consequently, products liability has become one of the most important, and politically controversial, forms of civil liability. Legal scholars who analyzed the emerging field of products liability rarely addressed efficiency concerns. Similarly, court opinions in products liability cases have paid little or no explicit attention to efficiency. But as the economic analysis of products liability has developed over the past few decades, so too have legal decision-makers become more concerned about the economic consequences of these liability rules. Today efficiency considerations often strongly influence the formulation of products liability laws, as reflected by the Restatement (Third) of Torts: Products Liability. This emphasis on efficiency is defensible. Sellers include their liability costs in the product price. Consumers (potential victims) accordingly pay for and receive the benefits of tort liability, so their preference for efficient liability rules—those that maximize the net benefit of seller liability—should govern. By analyzing products liability with an economic perspective, it becomes apparent that this body of law could be merely a specific application of contract law, since if unregulated market transactions were efficient, courts would only have to enforce contractual allocations of product risk in order to ensure efficient outcomes. Many product-caused injuries are governed by tort law, however, making it necessary to identify the market failures that may justify tort regulation. Sections 2 through 10 accordingly develop the economic framework for evaluating different liability rules. Sections 11 through 13 describe the impact that the products liability system has had on product safety, innovation, and the market for liability insurance. The remaining sections discuss the efficiency properties of the main doctrines in products liability.

Source Publication

Encyclopedia of Law and Economics

Source Editors/Authors

Boudewijn Bouckaert, Gerritt De Geest

Publication Date

2000

Edition

1

Volume Number

3: The Regulation of Contracts

Products Liability

Find @ NYU

Share

COinS