Question

One solution to externalities is to require those who may inadvertently impose harm or costs on others to purchase liability insurance. For example, states require automobile owners to purchase liability insurance to ensure they are able to pay for any costs imposed on other drivers from accidents. Insurance requirements help to privatize the social costs of driving, making those who drive bear the costs of risk of accident. Many companies are required to purchase workers compensation insurance or professional liability insurance to cover the costs of risks arising from their operations.

Should an insurance approach be used for other products that may unintentionally impose costs on others? For example, should gun owners be required to have liability insurance to cover unintentional injury caused by the guns they own? Below is a link to a website discussing the merits of the proposal.

Do you agree with the arguments? Will liability insurance help reduce the costs borne by third parties?

Are your arguments different for this product versus requirements for drivers to have auto insurance or businesses to have liability or workers comp insurance?

Answer 1

Liability insurance , can be powerful tool to reduce costs borne by third parties given that property rights are well defined. If the property rights are not defined , 3rd party will continue to make costs9harm) to society , making insurance unaffective.

Business must have liablility insurance or drivers must have auto insurance because property rights are well defined. For eg - auto has been insured against the driver and driver is fully responsible for the auto, making it direct and reduction in costs borne by 3rd party.