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Products Liability, Consumer Misperceptions, and Market Power

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Author Info
A. Mitchell Polinsky
William P. Rogerson

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Abstract

This paper compares alternative liability rules for allocating losses from defective products when consumers under- estimate these losses and producers may have some market power. If producers do not have any market power, the rule of strict liability .leads to both the first-best accident probability and industry output. If producers do have some market power, strict liability still leads to the first-best accident probability, but there will now be too little output of the industry. It is shown that if market power is sufficiently large, a negligence rule is preferable. Under this rule, firms can still be induced to choose the first-best accident probability, but now the remaining damages are borne by consumers. Since consumers underestimate these damages, they buy more than under strict liability. However, there is a limit to how much the negligence rule can encourage extra consumption. It is shown that if market power is sufficiently large, the rule of no liability may then be preferred to the negligence rule. Without any liability imposed, producers will not choose the first-best accident probability. However, this may be more than compensated for by the increased output of the industry.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 0937.

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Date of creation: Jul 1982
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Handle: RePEc:nbr:nberwo:0937

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  1. Marette, Stéphan, 2007. "Minimum Safety Standard, Consumers’ Information, and Competition (The)," Staff General Research Papers 12718, Iowa State University, Department of Economics. [Downloadable!]
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  2. Stéphan Marette & Jutta Roosen & Sandrine Blanchemanche, 2008. "Taxes and subsidies to change eating habits when information is not enough: an application to fish consumption," Journal of Regulatory Economics, Springer, vol. 34(2), pages 119-143, October. [Downloadable!] (restricted)
  3. Marette, Stèphan, 2005. "Regulatory Choice between a Label and a Minimum-Quality Standard, The," Staff General Research Papers 12486, Iowa State University, Department of Economics. [Downloadable!]
    Other versions:
  4. Bruce Hay & Kathryn E. Spier, 2005. "Manufacturer Liability for Harms Caused by Consumers to Others," American Economic Review, American Economic Association, vol. 95(5), pages 1700-1711, December. [Downloadable!]
  5. Palumbo, Giuliana & Iossa, Elisabetta, 2002. "Lender liability in the Consumer Credit Market," Economics Working Papers (Ensaios Economicos da EPGE) 451, Graduate School of Economics, Getulio Vargas Foundation (Brazil). [Downloadable!]
  6. Martin Gaynor & Deborah Haas-Wilson & William B. Vogt, 1998. "Are Invisible Hands Good Hands? Moral Hazard, Competition, and the Second Best in Health Care Markets," NBER Working Papers 6865, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  7. Stéphan Marette, 2007. "Minimum safety standard, consumers’ information and competition," Journal of Regulatory Economics, Springer, vol. 32(3), pages 259-285, December. [Downloadable!] (restricted)
  8. Coestier, B. & Gozlan, E. & Marette, S., 2002. "Prevention, Limited Liability and Market Structure," 2002 International Congress, August 28-31, 2002, Zaragoza, Spain 8531, European Association of Agricultural Economists. [Downloadable!]
  9. Andrew F. Daughety & Jennifer F. Reinganum, 2003. "Markets, Torts and Social Inefficiency," Working Papers 0308, Department of Economics, Vanderbilt University. [Downloadable!]
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  10. Anja Olbrich, 2008. "The optimal negligence standard in health care under supply-side cost sharing," International Journal of Health Care Finance and Economics, Springer, vol. 8(2), pages 73-85, June. [Downloadable!] (restricted)
  11. Tomas J. Philipson & Eric Sun, 2007. "Is the Food and Drug Administration Safe and Effective?," NBER Working Papers 13561, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  12. Bruce Hay & Kathryn E. Spier, 2004. "Manufacturer Liability for Harms Caused by Consumers to Others," NBER Working Papers 10972, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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