Second Best: The Soft Underbelly of Deterrence Theory in Tort

Abstract

Deterrence theory justifies tort law as a cure for market failures related to risky products and services. Negligence liability gives the providers of goods and services an incentive to take all cost-justified precautions in the design and manufacture of what they sell. Strict liability only creates those incentives, but also brings about the economically correct levels of production: suppliers' prices will reflect the relative riskiness of their goods, making consumers adjust their purchases to the level they would have demanded if they were fully informed about the products' residual hazards.' Thus, under either a negligence or a strict liability system, soft drink and beer manufacturers will take cost-justified steps to prevent bottles and cans from exploding, cutting drinkers' lips, and the like. Under strict liability, if bottles are more dangerous than cans even after these safety measures have been taken, the price differential between the two will reflect the risks and thus spur consumers to adjust their consumption decisions accordingly. The allocation of resources as between bottles and cans will be optimal. The validity of deterrence theory, as applied to claims by people who contract to buy the goods or services that cause their injuries, depends on an assumption about rational consumer ignorance. At least for low-probability risks, for which consumers may not have much intuitive feel, deterrence theory assumes that consumers will rationally invest little time or effort in informing themselves.2 Moreover, because of the relative unimportance of such risks in comparison to the costs of studying the language of a contract, the consumer may find it worthwhile to study even a clear and conspicuous dis-