I would personally choose to fix the problem. Yes, I think that the expenses would be great but in the long run I think it would pay off. Owning up to your mistakes and offering a fix will show the customers that you care for their safety. Fixing it will show that you stand behind your product 100% and you want to right your wrong. I believe people will appreciate that gesture.
Knowing an estimate of what it ultimately costs to make all of those changes may be a factor but a small factor. If you don't have any customer base it does not matter how much money your company has. The level of harm that is being caused to people would also be something that would be helpful in your decision making.
#2 I would choose option number 1 to fix it. I choose this because it is not uncommon for a product to not be perfect the first time around. Many products have become defective but as long as the manufacturer follows the right corrective measures it can be fixable. I choose this because to me the fact that a manufacturer can come out and be honest about the defect and show the customers that they care enough about the product to fix it and make sure that it never happens again and then keeps selling shows the manufacturer will make sure that their customers come first in happiness and that they truly believe in their product.