Research Handbooks in Law and Economics series
Edited by Thomas J. Miceli and Matthew J. Baker
Chapter 3: Liability versus regulation for product-related risks
Liability and safety regulation represent alternative mechanisms for controlling the risks that often arise from otherwise socially beneficial activities. Liability represents a private response whereby the victim of an accident brings suit for monetary damages against the responsible party, while regulation is a publicly imposed and enforced standard of conduct or safety that potential injurers must adhere to under threat of legal sanction. Historically, product-related harm was largely controlled by market forces under the doctrine of caveat emptor, or buyer beware, but the twentieth century witnessed a trend toward increasing producer liability, culminating with the establishment of strict producer liability in the 1960s (Cooter and Ulen, 1988, pp. 421ñ436). Government regulation of product safety, as distinct from tort liability, did not emerge until the 1970s, but has since become an important means, along with the liability system, for controlling product risk (Viscusi, Harrington, and Vernon, 2005, Chapter 22). Shavell (1984) has examined the optimal choice between these two modes of controlling risk in the context of a standard model of accidents between strangers (i.e., parties not in a contractual relationship). His analysis showed that neither approach generally produces the socially optimal level of risk-reduction. The drawback of regulation is that it sets a single standard that applies to all accident settings, given the inability of the regulator to observe victim-specific harm. Thus, care is not individualized under the optimal regulatory standard.
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