+1. My biggest complaint about the various comment threads on this post is that people keep being like “but if companies are liable for X, then the entire industry will go out of business!” and ~every time someone has said that I’ve thought “Umm, have you actually done a Fermi estimate? That shouldn’t be anywhere near enough to shut down the business, especially if they raise prices in response to the liability.”.
I have almost the exact inverse frustration, where it seems to me that people are extraordinarily willing to assume ‘companies all have gigantic Scrooge McDuck-style vaults that can pay any amount with no effect’ to the point where they will accept unexamined a claim that one corporation could easily accept full liability for 9/11.
I mean, I am often frustrated with that sort of reasoning too, but that’s not the thing driving my intuitions here. The thing driving my intuitions here is basically “look, if <product> is very obviously generating vastly more value than all the liability we’re talking about, then how on earth are all of it’s producers going to go out of business?”. Applied to the 9/11 example, that logic says something like “look, airplanes obviously generate vastly more value than all the liability of 9/11, so how on earth would that level of liability (and even an order of magnitude or more on top of it) drive airplane manufacturers out of business?”.
(Bear in mind here that we need to solve for the equilibrium, not just consider what would happen if that level of liability were suddenly slapped on companies in our current world without warning. The equilibrium world involves higher prices to account for the implicit insurance in nearly all goods and services, and it involves basically every business having liability insurance, and on the other side of the equation it involves the vast majority of regulatory agencies ceasing to exist.)
A potential answer, if you want to consider things through a pure econ lens, of why I would be skeptical of this policy even in a perfect-spherical-cow world without worries about implementation difficulties:
I commented this below, but reiterating here: in almost all products, the manufacturer generally does not capture anything remotely close to all of the value of a product they produce. The value of me having air travel available mostly accrues to, well, me. Boeing captures only a small portion of it. It is entirely possible for something to be a large net benefit to the world, and also for the harm it causes to drastically exceed the manufacturer’s portion of the benefits.
In theory, this can change by having Boeing raise their prices to capture more of the value they create, in order to pay this liability. (I wish to note in passing that I believe this would have to be quite a large price increase, but I do not consider that central to the argument. So long as the liability regime is applied evenly, and is impossible to evade by not having deep pockets—perhaps by requiring liability insurance? - all Boeing’s competitors will also have to implement the same price rises).
At that point, consumers will consume less (I believe often much less) of the product. Is that efficient? Sometimes yes, sometimes no. One central question to consider is whether reducing the amount of a product supplied would linearly reduce the amount of harm done:
Say a car sells for $20k, each car has a 1/10k chance of killing someone, you charge the manufacturer $10M if it does, the manufacturer adds $1k to the price of cars to pay this, and people respond by buying fewer cars. This is a fairly strong case for your liability theory! The small chance of people being killed by cars was an unpriced externality, which is being correctly internalized and hence reduced.
However, suppose that the supply of terrorism is determined by how many religious extremists have gotten mad at the US lately. In this case, your increase to air prices reduces the amount of air travel but does not reduce the amount of terrorism! Here, you’ve simply created a large deadweight loss by reducing the amount of air travel done, with no offsetting benefit.
In our real world, my objections are driven primarily by the ways in which our legal system is not in fact perfectly implemented. A list that I do not consider complete:
I don’t think it’s uncommon for judgments against deep-pocketed defendants to be imposed vastly in excess of harm done, to be driven primarily by public opinion rather than justice, or to cause huge indirect damages for no real benefit.
I believe that any company that found itself being legally liable for 9/11 would as a factual matter have been utterly destroyed by that liability, even if a perfectly even-handed justice system might have charged it only $100B, and that ‘that company having more insurance/higher prices to let it cover those costs’ would as a factual matter simply have resulted in it being charged more until it no longer existed, however much that required.
I am concerned that this policy would make many large industries be dominated by legal-skills over efficiency to a much greater extent than is already the case (and I kinda think that is already too much the case). If GM has 1% better lawyers than Toyota, but Toyota has 1% better cars than GM, the more that ‘legal liability costs’ are a major impact on a company’s bottom line the more GM ends up advantaged.
You suggest:
Product manufacturer/seller is still liable for all damages including from intentional acts, BUT
In case of intentional acts, the manufacturer/seller can sue whoever intentionally caused the damage to cover the cost to the manufacturer/seller.
I worry that this policy would lead to some interesting incentives around who to sell to. If Bill Gates goes crazy and uses a chainsaw to murder a bunch of teenagers, the manufacturer can recover from him. If I do, they cannot. This means...that...they should charge Bill Gates a lower price than me? We already have a lot of obnoxious politics around similar issues in car insurance, I’m not enthusiastic about extending that to every other industry.
It sounds like your most central concerns would mostly be addressed by a system similar to worker’s comp. The key piece of workers comp is that there’s a fixed payment for each type of injury. IIUC, There’s typically no opportunity to sue for additional damages, no opportunity to “charge more until the company no longer exists”, and minimal opportunity for legal skills to make the payments higher/lower.
Would that in fact address your most central concerns?
+1. My biggest complaint about the various comment threads on this post is that people keep being like “but if companies are liable for X, then the entire industry will go out of business!” and ~every time someone has said that I’ve thought “Umm, have you actually done a Fermi estimate? That shouldn’t be anywhere near enough to shut down the business, especially if they raise prices in response to the liability.”.
I have almost the exact inverse frustration, where it seems to me that people are extraordinarily willing to assume ‘companies all have gigantic Scrooge McDuck-style vaults that can pay any amount with no effect’ to the point where they will accept unexamined a claim that one corporation could easily accept full liability for 9/11.
I mean, I am often frustrated with that sort of reasoning too, but that’s not the thing driving my intuitions here. The thing driving my intuitions here is basically “look, if <product> is very obviously generating vastly more value than all the liability we’re talking about, then how on earth are all of it’s producers going to go out of business?”. Applied to the 9/11 example, that logic says something like “look, airplanes obviously generate vastly more value than all the liability of 9/11, so how on earth would that level of liability (and even an order of magnitude or more on top of it) drive airplane manufacturers out of business?”.
(Bear in mind here that we need to solve for the equilibrium, not just consider what would happen if that level of liability were suddenly slapped on companies in our current world without warning. The equilibrium world involves higher prices to account for the implicit insurance in nearly all goods and services, and it involves basically every business having liability insurance, and on the other side of the equation it involves the vast majority of regulatory agencies ceasing to exist.)
A potential answer, if you want to consider things through a pure econ lens, of why I would be skeptical of this policy even in a perfect-spherical-cow world without worries about implementation difficulties:
I commented this below, but reiterating here: in almost all products, the manufacturer generally does not capture anything remotely close to all of the value of a product they produce. The value of me having air travel available mostly accrues to, well, me. Boeing captures only a small portion of it. It is entirely possible for something to be a large net benefit to the world, and also for the harm it causes to drastically exceed the manufacturer’s portion of the benefits.
In theory, this can change by having Boeing raise their prices to capture more of the value they create, in order to pay this liability. (I wish to note in passing that I believe this would have to be quite a large price increase, but I do not consider that central to the argument. So long as the liability regime is applied evenly, and is impossible to evade by not having deep pockets—perhaps by requiring liability insurance? - all Boeing’s competitors will also have to implement the same price rises).
At that point, consumers will consume less (I believe often much less) of the product. Is that efficient? Sometimes yes, sometimes no. One central question to consider is whether reducing the amount of a product supplied would linearly reduce the amount of harm done:
Say a car sells for $20k, each car has a 1/10k chance of killing someone, you charge the manufacturer $10M if it does, the manufacturer adds $1k to the price of cars to pay this, and people respond by buying fewer cars. This is a fairly strong case for your liability theory! The small chance of people being killed by cars was an unpriced externality, which is being correctly internalized and hence reduced.
However, suppose that the supply of terrorism is determined by how many religious extremists have gotten mad at the US lately. In this case, your increase to air prices reduces the amount of air travel but does not reduce the amount of terrorism! Here, you’ve simply created a large deadweight loss by reducing the amount of air travel done, with no offsetting benefit.
In our real world, my objections are driven primarily by the ways in which our legal system is not in fact perfectly implemented. A list that I do not consider complete:
I don’t think it’s uncommon for judgments against deep-pocketed defendants to be imposed vastly in excess of harm done, to be driven primarily by public opinion rather than justice, or to cause huge indirect damages for no real benefit.
I believe that any company that found itself being legally liable for 9/11 would as a factual matter have been utterly destroyed by that liability, even if a perfectly even-handed justice system might have charged it only $100B, and that ‘that company having more insurance/higher prices to let it cover those costs’ would as a factual matter simply have resulted in it being charged more until it no longer existed, however much that required.
I am concerned that this policy would make many large industries be dominated by legal-skills over efficiency to a much greater extent than is already the case (and I kinda think that is already too much the case). If GM has 1% better lawyers than Toyota, but Toyota has 1% better cars than GM, the more that ‘legal liability costs’ are a major impact on a company’s bottom line the more GM ends up advantaged.
You suggest:
I worry that this policy would lead to some interesting incentives around who to sell to. If Bill Gates goes crazy and uses a chainsaw to murder a bunch of teenagers, the manufacturer can recover from him. If I do, they cannot. This means...that...they should charge Bill Gates a lower price than me? We already have a lot of obnoxious politics around similar issues in car insurance, I’m not enthusiastic about extending that to every other industry.
It sounds like your most central concerns would mostly be addressed by a system similar to worker’s comp. The key piece of workers comp is that there’s a fixed payment for each type of injury. IIUC, There’s typically no opportunity to sue for additional damages, no opportunity to “charge more until the company no longer exists”, and minimal opportunity for legal skills to make the payments higher/lower.
Would that in fact address your most central concerns?