Product Safety in International Trade ( Preliminary and Incomplete ) Eric Bond

We examine the determinants of the equilibrium level of product safety and the pattern of trade in a two country model where there is a safe product and a risky product. We compare the role of systems of consumer liability, producer liability, and setting of minimum standards for determining the level of product safety. With complete information and no transactions costs, changes in the degree of producer liability have no effect on equilibrium. Minimum quality regulation will increase the price of the risky good in the imposing country, and will benefit the exporting country. When there are transactions costs and consumers cannot identify the safety of products, higher levels of producer liability will raise consumer price and improve product safety. The country with the higher level of producer liability (other factors constant) will import the risky good if the efficiency of consumer compensation is sufficiently high. The importing country may gain or lose from stricter producer liability, depending on the extent to which damage costs are shifted onto foreign producers. Dept. of Economics, Vanderbilt University, Nashville, TN 37235. Tel: ++1 615 322 3339. Fax: ++1 615 343 8495. E-mail: [email protected]