Product Liability in the European Union: Compensation and Deterrence Issues

In Europe a common standard of strict liability has been introduced with the European directive 85/374. The implementation of this Directive has not led to an expansion of product liability cases. Moreover neither the product nor the insurance market has been dislocated as in the United States. Both the fact that most liability cases continue to be discussed under national legislation—even when it is based on liability with fault—and the different price of insurance in Eurpean Countries show that the directive did not reach its harmonisation goals. We discuss the optional provisions that limit strict liability under the directive, but claim that the scarce impact of liability laws—in spite of increasing concerns for product safety—may be due to compensation provided by the Welfare State and to the cost of access to justice in Europe. Compensation by the Welfare State is inadequate with respect to the internalisation of the cost of accidents especially when public institutions do not file claims against liable producers. Product safety regulation should have performed the deterrence function. However we also point out that the threat of reputation losses is a powerful incentive for firms to carefully control product safety, when consumers increasingly care about product quality and accidents are heavily advertised by media.JEL Classification: K13, K41