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In the United States, drugs are jointly regulated by the US Food and Drug Administration, which oversees premarket clinical trials designed to ensure drug safety and efficacy, and the liability system, which allows patients to sue manufacturers for unsafe drugs. In this paper, we examine the potential welfare effects of this dual system aimed at ensuring the safety of medical products, and conclude that product liability exemptions for FDA regulated activities could raise economic efficiency. We show that while reductions in liability, such those associated with pre-emption, may lower welfare in the absence of the FDA, they may raise welfare in its presence. In the presence of the FDA, product liability may reduce efficiency by raising prices without pushing firms, who are already bound by the agency's requirements, to invest further in product safety. We consider as a case study the National Vaccine Injury Compensation Program, which sharply reduced vaccine manufacturer's liability in 1988. We find evidence that the program reduced prices without affecting vaccine safety, suggesting that liability reductions can enhance economic efficiency in the presence of the FDA.

The Effects of Product Liability Exemption in the Presence of the FDA