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Commentary

Vioxx verdict’s dark side
A. Mitchell Polinsky, Steven Shavell, The Boston Globe, 8-23-05

The rationale for our tort system is that it compensates individuals for their losses from the negligent activities of others—thereby improving social welfare and encouraging companies and individuals to behave more responsibly. But this presumes that jury awards are both proportionate to the harms inflicted, and predictable, i.e. it should be clear ahead of time what kinds of activity will be punished, and which are encouraged.

However, our tort system in recent years has produced so many enormous jury awards for so many dubious causes that it has become a lottery for redistributing wealth—it is certainly neither proportionate nor predictable. Shavell and Polinsky identify three consequences of this development that “may be disadvantageous to us as consumers”:

First, the prices that we pay for goods and services will tend to rise. Drug companies have to charge enough to cover their costs, and when these costs include large liability bills, the result is higher prices. For instance, one study found that the price of the DPT vaccine for infants rose 6,000 percent mainly because of potential liability.
The second problem is that products might not be developed, or might be withdrawn from the market, even though they are valuable to us. …
The third difficulty caused by large damage awards is excessive producer caution, adding to costs and prices. A classic example is defensive medicine, such as the ordering of unneeded tests due to the fear of lawsuits.

They also note that “our legal system is an extremely expensive way to go about compensating individuals,” since $100 in compensation carries with it about $100 in legal costs. No society that hopes to encourage widespread innovation and entrepreneurship can long afford a legal system like the one we have today.



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