Recent studies on the health consequences of obesity have shown that overeating may be as dangerous as smoking in terms of life expectancy (Sturm and Wells). Abuse of alcohol, cigarettes and/or fa(s)t food increases loss of human lives and health care costs. This raises the question of the best policy response through alternative instruments such as taxation, liability, information campaigns (health-warnings) or advertising restrictions. These policies are designed to decrease consumption, either by influencing prices, raising consumer awareness or limiting access to products. For instance, liability payments have been imposed due to the lack of information about health-risks provided by tobacco companies to consumers (Bulow and Klemperer). The US fast-food industry faces similar lawsuits for misleading advertising or absence of information about risks as we describe in the next section.
This article analyzes the complex interaction between liability, information about risks and consumer demand. Specifically, we seek to answer the question: should regulators or courts rely on health-labeling or on tort law for regulating and limiting “dangerous consumption”? This question is important since recent legal attempts to hold the US fast-food industry responsible for obesity are likely to extend to that part of the agri-business sector that produces high energy foods. To address this question, we adopt a normative approach that could provide some guidelines for regulators and/or courts.
The impacts of alternative liability rules and a mandatory labeling policy are detailed in a market context (Cournot competition) and compared with the position of a regulator who seeks to maximize welfare, taking into account profits of firms, consumer surplus and social damages. Liability rules provide (complete or partial) compensation to consumers and reduce output and profits of firms, while mandatory labeling enables consumers to make better choices with respect to health risks. We consider several liability rules, namely strict liability, the negligence rule and the comparative negligence rule gaining momentum in many US states. These rules allow to consider different divisions of the burden for an accident on the plaintiff and defendant, based on the revealed information or the level of preventive care.
We show that if the expected damage is relatively low, the absence of intervention is socially optimal since price/quantity distortions are avoided. In particular, informing consumers is not optimal even if the cost of information is zero. If the expected damage is relatively large, liability rules are not efficient for regulating the market due to the insolvency of firms. In most cases, mandatory labeling is sufficient and essential for maximizing welfare and reducing consumption (and obesity). Liability rules are essential for maximizing welfare only for high levels of risk and/or if consumers misperceive health warnings.
The literature on this topic has overlooked the links between information, insolvency of firms and market structure. Polinsky and Rogerson focus on the optimality of alternative liability rules in a market context, when consumers misperceive risks. However, they do not consider the insolvency problem, they take consumer risk perception as exogenous and they do not study the efficiency of a comparative negligence rule. Conversely, in this article, insolvency is endogenous to the market structure, which limits the efficiency of liability tools, consumer perception of risks may be improved through (mandatory or voluntary) disclosure of information, and comparative negligence may be a tailored instrument for capping consumption.
