There is considerable legal controversy about product safety. Two extreme positions might be termed caveat emptor (let the buyer beware) and caveat vendor (let the seller beware). Under the former scheme producers would have no responsibility for the safety of their products: Buyers would absorb all losses. Under the latter scheme this liability assignment would be reversed: Firms would be completely responsible under law for losses incurred from unsafe products. Using simple supply and demand analysis, discuss how the assignment of such liability might affect the allocation of resources. Would safer products be produced if firms were strictly liable under law? How do possible information asymmetries affect your results?

Caveat emptor and caveat vendor are two different types of liability assignment in product safety. Caveat emptor means "let the buyer beware," which implies that the producer has little or no legal responsibility for the products' safety, and the buyer bears the risk of harm. On the other hand, caveat vendor means "let the seller beware," meaning the producer has complete legal responsibility for any losses incurred due to unsafe products.

Under the caveat emptor system, the producer has no legal responsibility for product safety, and buyers would bear the risks of any losses. This would potentially lead to: 1. Lower production costs for producers, as they would not need to invest in safety checks and improvements, resulting in a shift of the supply curve to the right. 2. Buyers bearing the risk of losses would scrutinize products to ensure safety, reducing the demand for products with perceived safety risks, causing a shift of the demand curve to the left. The equilibrium price under caveat emptor would be lower due to the shifts in supply and demand curves, but the allocation of resources may not lead to optimal levels of product safety.

Under the caveat vendor system, the producer has complete legal responsibility for product safety. This would potentially lead to: 1. Higher production costs for producers, as they would need to invest in safety checks and improvements, resulting in a shift of the supply curve to the left. 2. Buyers would be more confident in purchasing products, as the responsibility lies with producers, causing a shift of the demand curve to the right. The equilibrium price under caveat vendor would be higher due to the shifts in supply and demand curves, and the allocation of resources may lead to more optimal levels of product safety.

Under stricter liability laws, producers have an incentive to ensure their products are safe to avoid legal losses. This would lead to higher investments in research and development, safety checks, and improvements, increasing the overall safety of produced products.

Information asymmetry exists when one party in a market transaction has more or better information than the other party. In this case, producers have better information about the safety of their products than buyers. This can affect our analysis in the following ways: 1. Under caveat emptor: Since buyers cannot accurately assess the safety of products, they might be willing to purchase unsafe products, shifting the demand curve to the right and causing higher prices for unsafe products. 2. Under caveat vendor: Since producers bear the legal responsibility, they have a stronger incentive to provide accurate information about their products. However, if safety improvements' costs exceed the potential losses from liability, producers might still sell unsafe products, albeit with a lower probability. In conclusion, a caveat vendor system can lead to a higher level of product safety due to the higher legal responsibility placed on producers. However, information asymmetries may still result in less-than-optimal safety levels in both systems. Proper regulation and consumer awareness can make the market more efficient in achieving safe products.