Reference no: EM132185475

Question for the DOE v. MILES LABORATORIES, INC.

Judge Ramsey argued that strict liability forces manufacturers to internalize all the costs associated with their productive activity and to raise their prices accordingly. If there were no liability for dangerous products, manufacturers could charge lower prices and consumers would buy more. The result is the inefficient overproduction of dangerous products because the manufacturer's prices do not reflect the true social costs.

But why conclude that the risk of injury is a cost of supplying the product? Why isn't it a cost of using the product? Coase's theory of reciprocal causation, suggests that the risk is associated with both activities. Generally the user can take the risk into account in deciding how much he is willing and able to pay to use a dangerous product, if he is aware of the risks. If the user must bear the costs of injury, the risk is reflected in the maximum price he will be willing to pay. The reduced willingness to pay generally results in fewer units of the product being bought, reducing production to an efficient level.

A comparison of the relative abilities of the manufacturer and user may direct the imposition of liability to one or the other. If both the manufacturer and the user have complete information about the risks and are equally able to adjust their behavior to account for the risk, there is no reason to prefer manufacturer liability over no liability. Unless consumers are preferred to manufacturers or vice versa, it does not matter whether the level of activity is reduced to an efficient level by increased prices reflecting greater risks borne by manufacturers or by decreased willingness to pay reflecting the greater risks borne by consumers.

There is a reason to believe, however, that manufacturers have a greater ability to evaluate the risks associated with their products and to reflect those costs in their prices accurately. The buyer may investigate carefully every product he buys and still not know as much about it as the manufacturer. The manufacturer is much more likely to know the design characteristics of a product and the probability of a manufacturing defect as a result of repeated, daily experience with the product and its characteristics. After a certain number of defects appear, the manufacturer may be able to project the frequency with which consumers will be injured and reflect potential judgment costs in its prices. The consumer, on the other hand, may have only a single experience with a product, may be unfamiliar with prior defects, and be unable to evaluate how much less he is willing to pay.

QUESTIONS: How does the imbalance in the availability of information to consumers and manufactures affect the choice between no liability and strict liability for product defects? Is fault-based or strict liability a superior method for ensuring that dangerous products are neither over- nor under-produced?