Why product liability may lower product safety

- Shifting accident losses to a monopolist may reduce product safety.
- Combination of both marginal and average consumer harm levels influences safety.
- Insurance costs of the consumer/firm can moderate safety incentives.
- Monopolists will often profit from the shifting of losses to firms.
- Consumers may oppose loss-shifting.

This article shows that shifting accident losses from consumers to a monopolist may lower product safety when fully informed consumers differ in their level of harm. In determining product safety, the monopolist considers a linear combination of the average harm of all consumers served and the harm level of the marginal consumer. Shifting more losses to the monopolist allocates more of the firm's attention to the average harm level, which is lower than the harm level of the marginal consumer. The fact that shifting losses to the firm may reduce product safety is robust to the consideration of insurance costs.