The Economics of Product Safety

The report of the National Commission on Product Safety stated that the American public is being exposed to many unreasonably hazardous products. Further, the post-accident remedies to compensate victims of product-related accidents are inadequate and encourage the continued production of unsafe products. It is believed that a shift in assignment of liability for accident costs from consumers to sellers would discourage sales of the more hazardous product grades thereby reducing the frequency and severity of home accidents. This conclusion cannot be derived from economic theory. Indeed, under fairly plausible conditions, a shift to producer liability can lead to the increased production of riskier product grades. The theory developed in this paper argues that the demand for a risky product is determined by the full price consisting of the price of the parent risky good plus the imputed expected damage costs. The consumer maximizes utility by demanding that product grade which minimizes his full price. In the concluding section of the paper, attention is directed to the welfare implications of the policy alternatives for the product safety problem.