Consider the following hypothetical concerning the economics of products liability. Let the inverse market demand for a product be given by the expression p = 5,000 − 20q, where P is the price and Q is the quantity demanded. The inverse market supply for this product is given by the expression P = 1,000 + 5Q and the market is competitive. When a consumer purchases one unit of this product, a harm of $10,000 arises with a probability of 0.1. Suppose initially that consumers and firms accurately perceive this risk.

1. What is the equilibrium price and quantity under no liability?

2. What is the equilibrium price and quantity under strict liability? Assume that

   courts do not err when awarding compensatory damages.

3. What is the equilibrium price and quantity under strict liability when courts award

   punitive damages of $50,000 in addition to compensatory damages of $10,000?

Assume now that courts err when awarding damages under strict liability. In particular, they only award a fraction s of harm as damages to the plaintiff, where s ∈ [0,1]. Put another way, a plaintiff is awarded ???? = sL. Punitive damages are no longer awarded.

d. Now, what is the equilibrium price and quantity?