Abstract
This chapter discusses product liability. The question of product quality has been addressed by economists who have considered the effects of different legal rules for law suits arising from defective products or from accidents occurring in the use of marketed commodities. The chapter presents some necessary conditions in each market for achieving full optimality in a complicated market setting. It is impossible to design a social system that can maintain all the first-order conditions in the presence of commodities involving the full range of complications. This follows from the difficulties in providing insurance and information about defects with low probability and variations across products and users. Designing reasonable laws and institutions to deal with product liability is a second-best problem. While simple models are valuable for analyzing these problems, it is difficult to know just how to use them to formulate a policy.
Published Version
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