Markets, Tort Law, and Regulation to Achieve Safety

By Rubin, Paul H. | The Cato Journal, Spring-Summer 2011 | Go to article overview

Markets, Tort Law, and Regulation to Achieve Safety


Rubin, Paul H., The Cato Journal


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 ease 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 ease 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.

The Market for Safety

There are three major forces for safety. We tend to think first of regulation and second of litigation in the form of tort law (including malpractice and product liability) to increase safety, but in fact the most important force for safety is the market itself. People demand safety and markets provide what people want. Moreover, safety is what economists call a "normal" good--a good where demand increases with income. Therefore, as societies become richer through market exchange and economic freedom, safety increases. The other two forces for safety may also lead to increases (although this is by no means certain), but the role of markets is paramount.

In this article, I discuss the three major forces for safety. In discussing regulation and tort law, I will compare each to the market. I then discuss interactions between regulation and tort law. Throughout the discussion, I stress the role of ambiguous goods--goods that both increase and decrease safety. For example, pharmaceuticals reduce risk of disease but have side effects that are sometimes harmful. This class of goods turns out to be both important and difficult for any of the three safety systems to handle.

Markets will provide the amount of first-party safety that consumers desire if the information environment is correct. That is, if consumers want safer products enough to be willing to pay for them, then businesses will find providing safety profitable and will provide the level of safety that consumers desire. Tiffs is the strongest force for safety.

As shown in Figures 1 and 2 and in Table 1, as incomes increase, accidental death rates, a measure of safety, are reduced. In Table 1 we see that coefficients on death rates as a function of per capita incomes are negative, meaning that higher incomes lead to lower death rates, and these coefficients are statistically significant. This happens both within the United States over time (Figure 1) and across countries (Figure 2). The results of the time series and cross-sectional regressions of accidental death rates on per capita GDP are the following. In case of the U.S. time series data, the coefficient on per capita GDP is -0.0009 with a t-statistic of -10.4621. The [R.sup.2] value for this regression is 0.7133. In the case of the time series data for 112 countries, the coefficient on per capita GDP is -0.0005 with a t-statistic of -2.6579. The [R. …

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Markets, Tort Law, and Regulation to Achieve Safety
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