Tort liability for personal injuries and property damage caused by products is known as product liability. Among the most prominent products associated with product liability claims are pharmaceuticals, medical devices, private aircraft, automobiles, and cigarettes.
Damages awarded to injured parties raise the costs of providing the product, thus increasing the costs to the firm of selling unsafe products. In theory, where the damages equal the value of the harm, the damages payment leads the firm to internalize the costs of the harm and creates incentives for the firm to produce safer products. In this article I focus primarily on whether American product liability law does in fact enhance product safety.
Posing the question of whether product liability law is safety-enhancing does not, however, imply that this framing of the mission of product liability is appropriate. Higher levels of safety may not be desirable. For almost all products, it does not make economic sense to ensure that products are risk-free. Rather, from the standpoint of economic efficiency, for continuous safety choices the penalties established through tort liability should provide financial incentives for firms to provide the products that achieve a level of risk that equates the incremental benefits of greater safety with the incremental costs. Thus, if the safety level of the product falls short of the efficient level, product liability can potentially play a productive role by penalizing firms for a shortfall between the level of product safety provided and the efficient level of safety, thus pushing the level of safety closer to its efficient level.
This task of establishing efficient incentives for product safety is not limited to a point in time. As technological change evolves over time, firms should continue to improve their products to maintain this benefit-cost balance. Technological change generally will lead to enhanced safety levels in any given product if the changes involve innovations that decrease the costs of providing safer products. If the cost of providing a given level of safety decreases, then the firm will find it efficient to improve the safety of the product.
However, technological change also may lead to the introduction of new products posing novel risks. Whether product liability will make products safer is a question that should be framed more broadly in terms of whether product liability also fosters the introduction of welfare-enhancing new products. The court's task of assessing innovative products often entails more problematic judgments than with assessments of existing technologies, so that the concern for safety with respect to innovations may in fact stymie such innovations. Novel products may be safer than existing products but may pose new kinds of risks. If there is a bias of product liability against novel risks, then there will be a disincentive with respect to product innovations.
A review of the empirical evidence and case studies on the role of product liability demonstrates that the idealized world in which the tort liability system is supposed to produce efficient levels of safety is not how product liability law actually performs. As I will demonstrate, the report card on the performance of product liability law is mixed. In some instances tort liability does serve a potentially risk-reducing role by fostering new safety measures. However, the safety-enhancing role of liability fails to be realized in general because of fundamental deficiencies in product liability law and the way such cases are handled by the courts. In particular, courts make excessive and unpredictable awards and stumble when faced with uncertainties. New products posing uncertain risks are especially hard hit so that product liability often serves as a barrier to innovations that would reduce accidents.
The Efficient Safety Reference Point
In a simple economic framework in which firms have constant unit costs of production, providing products with a higher level of safety will result in a higher level of unit costs for the product. …