Economic Analysis of Product Liability

Summary

INTRODUCTION

It is logical in a project which focuses on the effectiveness of the Product Liability Directive, especially with a view on potential damage that could be caused by new technologies, to also pay attention to the economic approach to product liability. The European Group on Tort Law has a long tradition of incorporating economic analysis in its earlier work, and hence it is also useful to incorporate the economic approach into the debate on a potential reform of product liability. This is all the more the case since even in the early law and economics literature that emerged in the 1970s the economic analysis of product liability was already well developed. Moreover, several authors in the US have paid extensive attention to product liability as it was held that this was a mechanism that could potentially lead to high liability costs and thus to ‘crushing liability’ for industry. There is, moreover, not only the ‘old’ law and economics approach to product liability, which emerged in the 1970s and 1980s; indeed, a lot of the more recent law and economics literature has also addressed product liability in an empirical manner, addressing inter alia the question of to what extent product liability regimes have been able to contribute to safer products and adequate compensation of victims.

This contribution will provide the traditional economic analysis of product liability law and also apply those insights to the liability regime as it has been incorporated into the Directive. However, an interesting aspect of the economic approach is that it has equally generated criticism with respect to the question whether a European approach to product liability is warranted at all. This is done in the so-called economics of federalism and is also worth a brief discussion.

The project description rightly asks for attention to be paid to specific problems related to causation in the specific case where multiple parties are involved in a product accident or where there is uncertainty concerning the producer. Moreover, specific problems may occur with new technologies whereby the question arises as to what extent product liability standards and legislation can and should be rapidly adapted to technological developments, still providing sufficient incentives for prevention to operators.