Revised 11/09.
Abstract: In this Article we compare the benefits of product liability to its costs and
conclude that the case for product liability is weak for a wide range of products.
One benefit of product liability is that it can induce firms to improve product
safety. Even in the absence of product liability, however, firms are often
motivated by market forces to enhance product safety because their sales may fall
if their products harm consumers. Moreover, products must frequently conform
to safety regulations. Consequently, product liability might not be expected to
exert a significant additional influence on product safety — and empirical studies
of several widely sold products fail to find an effect of product liability on the
frequency of product accidents. A second benefit of product liability is that it can
improve consumer purchase decisions by causing product prices to increase to
reflect product risks. But because of litigation costs and other factors, product
liability may raise prices excessively and undesirably chill purchases. A third
benefit of product liability is that it compensates victims of product-related
accidents for their losses. Yet this benefit is only partial, for accident victims are
frequently compensated by insurers for some or all of their losses. Furthermore,
the payment of compensation for pain and suffering actually reduces the welfare
of individuals because it effectively forces them to purchase insurance for a type
of loss for which they ordinarily do not wish to be covered. Offsetting the
potential benefits of product liability are its costs, which are great. Notably, the
transfer of a dollar to a victim of a product accident via the liability system
requires more than a dollar on average in legal expenses. Given the limited
benefits and the high costs of product liability, we come to the judgment that its
use is often unwarranted. This is especially likely for products for which market
forces and regulation are relatively strong, which includes many widely sold
products. On the other hand, the use of product liability may be desirable for
products for which these factors are weak. Our generally skeptical assessment of
product liability for products for which market forces and regulation are strong is
in tension with the broad social endorsement of such liability.