Question

Suppose that courts begin imposing higher fines on appliance companies that manufacture products that occasionally malfunction and harm consumers. Appliance companies can make expenditures that decrease the likelihood of malfunctioning. Does the change in the court’s behavior change the expected marginal benefit of avoiding an accident or the marginal cost of avoiding an accident? What happens to the rate of product malfunctions?

Answer 1

The court's decision is in the right direction and can help in reducing the marginal cost of avoiding an accident because no fine will be imposed on companies that decrease the likelihood of malfunctioning and expected marginal benefit of avoiding an accident also increases. Though it will lead to increase in the total cost of the firm initially but in the long run it is beneficial for the firm as it will reduce fines and also increase the sales of the firm.

Imposition of fines by the government will reduce the rate of product malfunctions because firms will invest in reducing malfunctioning of their appliances and thus overall cost declines.