PS8 - the user suffers a monetary loss of $5,000. An...

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Legal Studies 145 - Law and Economics I P ROBLEM S ET #8 1. Briefly compare the economic analysis of products liability to the economic analysis of torts between strangers. Assume the policymaker has an "economic" objective function. That is, she is trying to maximize the social value of a particular activity, which is a function of various costs, benefits, and other factors. Compare the objective functions of products liability to those of torts between strangers, i.e., how should we, from an economic perspective, define the efficient outcome in each of the two contexts? 2. Explain what roles the market plays in product injuries that it does not play in torts between strangers. Why might liability be more necessary in the tort context than in the products context? 3. A properly-handled cola bottle has a 1/100,000 chance of exploding, in which case
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Unformatted text preview: the user suffers a monetary loss of $5,000. An extra-thick bottle costs an additional 4 cents to produce and reduces the risk of explosion to zero. Assume the cola industry is competitive. a. Suppose that consumers accurately perceive that the risk of explosion is 1/100,000 for normal bottles. Compare the outcomes under strict liability to those under no liability. b. Suppose that consumers erroneously believe that the risk of explosion is 0 even for normal bottles. Compare the outcomes under strict liability to those under no liability. c. Suppose that there is also a second class of consumers who suffer a loss of $2,500 rather than $5,000 when a bottle explodes. Again assume that consumers accurately perceive the risk of explosion. Compare strict liability to no liability. Recall that there are now two different classes of consumers....
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