Abstract
In this paper, we consider the problem of setting minimum safety standards for observable safety characteristics and the proper amount of effort in the production of safety for a product which has some unobservable safety attributes. We formulate a second-best optimum for a regulator, examine the interplay between safety effort and a minimum safety standard, and study how the internalization of excess costs or benefits by a self interested regulator affects the minimum safety standard and the safety effort level. Finally, we present two examples using a utility function which is widely used in the law and economics literature.
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