In recent years,individuals and state governments have sued various tobacco companies to compensate for illness and injury allegedly caused by cigarette smoking.Courts have awarded millions of dollars to victims in these cases.This product liability law:
A) encourages firms to ignore safety issues when developing products.
B) creates an incentive incompatibility between producers and consumers.
C) encourages incentive compatibility between producers and consumers.
D) is the only way to achieve compatible incentives when consumer safety is at issue.
E) forces firms to declare bankruptcy and to default on bondholders.

Question

Quizplus · Accepted Answer

The product liability law encourages incentive compatibility between producers and consumers because it holds producers responsible for the safety and effectiveness of their products. This incentivizes firms to prioritize safety when developing products while also providing compensation for victims who suffer harm from using these products. Option A is incorrect because the product liability law encourages firms to prioritize safety issues. Option B is incorrect because the law aligns incentives between producers and consumers rather than creating an incompatibility. Option D is incorrect because there may be other ways to achieve incentive compatibility when consumer safety is at issue. Option E is incorrect because the law does not force firms to declare bankruptcy or default on bondholders.

In Recent Years,individuals and State Governments Have Sued Various Tobacco