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Economics of Product Liability

Economics of Product Liability

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Economics of Product Liability

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  1. Economics of Product Liability

  2. Product defects • Defect in design • Defect in manufacture • Defect in warning

  3. What standard would economics recommend for product related accidents? • In most cases the defects with respect to design and manufacturing are unilateral • The producer is also the one most likely to be aware of special dangers

  4. Escola v. Coca Cola (1944) • While placing bottles of Coca Cola in the refrigerator, a bottle explodes in the hand of a grocer store clerk, seriously injuring her hand. • There is no evidence that the bottle was mishandled and there is evidence that other bottles have exploded spontaneously. • The court concludes that the bottle was defective. Given that the bottle was defective is that sufficient proof that Coca Cola was negligent?

  5. Escola v. Coca Cola (1944) • res ipsa loquitur(rayz ip-sah loh-quit-her) n. Latin for "the thing speaks for itself," • Does the defect prove negligence? • (1) defendant had exclusive control of the thing causing the injury and • (2) the accident is of such a nature that it ordinarily would not occur in the absence of negligence by the defendant.

  6. Escola v. Coca Cola (1944) • “…the evidence appears sufficient to support a reasonable inference that the bottle here involved was not damaged by any extraneous force after delivery to the restaurant by defendant. It follows, therefore, that the bottle was in some manner defective at the time defendant relinquished control, because sound and properly prepared bottles of carbonated liquids do not ordinarily explode when carefully handled.”.

  7. The Thing Speaks for Itself • Suppose there was no way of producing bottles that were 100 percent safe? • How would we know this without examining production standards and the cost of production?

  8. Product related accidents • These are most likely bilateral in nature • Suppose the manufacturer could not avoid liability for customer misuse • All customers would pay a higher price • Careful customers would subsidize careless customers • The cost of insurance is tied to the price of the product • Careful customers may be denied products that produce a consumer surplus

  9. Enterprise liability • Manufacturers are responsible for all accidents arising from the use of their product