Automobiles and Safety
Since the late 1960’s, the National Highway Traffic Safety Administration
has set increasingly stringent standards for automobile safety. Accident
avoidance standards (pertaining to brake systems, tires, and steering
mechanisms) have been effective in reducing fatalities at relatively little
cost. Occupant protection standards also have been crucial in saving lives,
but these are much more costly. These standards include requirements
concerning head restraints, windshield glass, side door strength, and, of
course, seat belts. The last decade has seen further safety initiatives:
mandatory seat belt laws in many states, so-called “passive” seat belts, and
air bags.
Automobile manufacturers and many car buyers see the cost of further
regulation as too high. Safety advocates counter by arguing that the cost of
doing nothing – increased deaths and injuries from accidents – is even
greater. Thus, the argument rages concerning the “right” amount of
automobile safety. Safety regulation of the automobile raises a chorus of
questions: What are the costs and benefits of current auto safety programs?
What factors contribute to death and injuries in automobiles, and what safety
decisions would most effectively save lives? How much is society – that is,
producers, consumers, and the government – willing to pay for greater
safety? the information needed to begin answering these questions depends
on many factors, including factory costs, engineering studies and accident
simulations, consumer purchasing (and driving) behavior, and societal value
judgments.
As a concrete example of the issues involved, we choose to focus on a
particular question: whether regulations requiring the fitting of air bags on
new cars should be implemented.1 Numerous studies have attempted to
1a clear discussion and overview of these studies is provided by R. Crandall et al., Regulating the
Automobile (Washington D.C.: The Brookings Institution, 1986). The present discussion (in a greatly
simplified form) is drawn in part from this source.
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value the benefits and costs of an air bag program. Consider the following
question: If front seat air bags were fitted on all automobiles, what would be
the predicted benefits in terms of lives saved and injuries prevented, and
what would be the total costs?
First, let’s focus on lives saved. Despite differing methodologies, numerous
studies have produced estimates in a manageable range of between 4,000
and 8,000 lives saved annually. (In all, some 50,000 to 55,000 lives are lost
in automobile deaths each year.) For the moment, we will put aside the
quantification of injuries prevented. What about the cost of air bags? Cost
estimates range between $800 and $1,200 per car. Because about 15 million
new cars are purchased in the United States each year, the total annual cost
would be between $12 billion and $18 billion. (This is the cost of
maintaining air bags in all U.S. cars. In all about 100 million vehicles are on
the road. Ten million cars are retired each year and replaced by 15 million
new vehicles.)
Based on the information above, are the benefits of air bags worth the cost?
2. Deep-Water Harbor for Machias, Maine, reproduced on the next page
makes for an interesting discussion assignment. The instructor should
distribute the page to students and ask them to prepare to discuss the
concluding questions.
Suggested Answers
a. Here is a sample benefit-cost outline of the Machias oil refinery.
Affected Group Benefits Costs
Oil consumers Consumer Surplus
(more oil, lower prices)
Oil Companies Added profit
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Other Business Added profit
Unemployed workers Wage income
(net of lost leisure)
State & City Tax Payers Capital and Operating Costs
Tourism Lost tourist industry profit
Lost consumer surplus
Society Environmental cost of
oil spills, oil pollution
b. Valuing benefits. The benefit to consumers of more abundant oil at
lower prices would be estimated by the increase in the consumer
surplus triangle. A regional macroeconomic model would be useful in
estimating the potential increase in business activity (business profits).
The value of new jobs should be based on estimated market wages.
Estimates of capital and operating costs depend on engineering and
economic information (how much concrete at what prices). Key
uncertainties surround the long-term forecast of oil demand, the cost
of the facility, environmental costs, and the potential adverse effect on
tourism.
Deep-Water Harbor for Machias Maine
Some years ago, the governor of Maine assembled a task force to evaluate
several oil company proposals to develop a deep-water harbor for tankers
and to build a refinery at Machias, a seaport at the northeast end of the
state’s rocky and unspoiled coast. Following are miscellaneous facts that
may (or may not) be relevant to a benefit-cost analysis of the proposal.
(1) The harbor and refinery would process 30,000 barrels of crude oil per
day into home-heating oil, gasoline, and other fuels.
(2) The complex would provide cheaper oil to the state and to the northeast
in general. (Neighboring New Hampshire imports much of its oil from
Canada.)
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(3) Recently, a tanker broke up off the Maine coast, causing a major oil
spill. Coastal property owners believe the harbor and refinery would
jeopardize the value of their land.
(4) Industries in the region, including utilities, construction companies, and
the state’s railroads, vigorously support the project.
(5) Unemployment in the region is 3 percent above the national average.
(6) The growth of Maine’s tourist industry (the state’s biggest industry) has
leveled off in recent years.
(7) Several oil companies are competing for the project.
a. Outline a benefit-cost analysis of the proposed project.
b. Select three or four benefits or costs and explain how they might be
valued. Describe some of the major uncertainties inherent in the
benefit-cost analysis. What additional information about these risks
would be useful?
3. A Gas Tax. In arguing for a 50-cent federal tax on gasoline, economist
Gregg Easterbrook lists some of the benefits: “The S.U.V. and pickup-truck
crazes would not have occurred, or at least these vehicles would be much
less popular; highway deaths would have been fewer; and gasoline
demands would be lower as would oil imports. To continue, the world
price of oil would have been lower, since petroleum demand in the United
States is the first factor in oil markets; greenhouse-gas emissions in this
country would be lower; Persian Gulf oil states would have less influence
on the global economy and less significance to American foreign policy;
fewer dollars would have flowed to oil sheiks; and the trade deficit balance
for the United States would be smaller.”
Do you agree with these arguments for the 50-cent tax?
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ADDITIONAL MATERIALS
I. Short Readings
C. C. Miller, “U.S. Clears Google’s Acquisition of Travel Software,” The
New York Times, April, 11, 2011, p. B1.
S. E. Ante and A. Schatz, “T-Mobile Deal Faces Antitrust barriers,” The Wall
Street Journal, March 21, 2011, pp. B1, B6.
T. Catan and N. Koppel, “Regulators Eye Apple Anew,” The Wall Street
Journal, February 18, 2011, pp. B1, B7.
B. Applebaum, “As U.S. Agencies put more Value on a Life, Businesses
Fret,” The New York Times, February 17, 2011, p. A1.
J. B. White, “American Idle: On the Road,” The Wall Street Journal,
February 2, 2011, pp. D1, D2. (How to deal with traffic congestion.)
A. S. Blinder, “The Carbon Tax Miracle Cure,” The Wall Street Journal,
January 31, 2011, p. A15.
D. Leonhardt, “Proving Innovation in Medicare,” The New York Times,
October 20, 2010, pp. B1, B8.
A. Singhal, “Competition in an Instant,” The Wall Street Journal, September
17, 2010, p. A19.
C. Rule, “Trust Us isn’t an Answer,” The Wall Street Journal, September 17,
2010, p. A19.
(This article and the preceding one debate whether Google is good or bad
for competition.)
G. Harris, “The Public’s Quiet Savior from Harmful Medicines,” The New
York Times, September 14, 2010, p. D1.
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S. Reddy, “Restaurant Letter-Grading Serves Up Anxiety,” The Wall Street
Journal, August 27, 2010, p. A19.
K. Weintraub, “What me Worry?” The Boston Globe, July 12, 2010, pp.
G4-G5.
T. Catan, “Trustbusters Try to Reclaim Decades of Lost Ground,” The Wall
Street Journal, February 1, 2010, p. A2.
“Wiser Wires,” The Economist, October 10, 2009, pp. 71-73.
“Return of the Trustbusters,” The Economist, August 29, 2009, pp. 53-54.
“Government versus Market in America,” The Economist, May 30, 2009, pp.
25-27.
J. B. Stewart, “Few Match Google; Does that Make it a Monopoly?” The
Wall Street Journal, May 6, 2009, p. D2.
“Organ Donation: The Gap between Supply and Demand,” The Economist,
October 11, 2008, pp. 79-81.
R. Hahn and P. Passell, “The Rush to Re-Regulate,” The Economists’ Voice,
July 2008, pp. 1-3.
S. Castle, “Microsoft Gets Record Fine and a Rebuke from Europe,” The
New York Times, February 28, 2008, p. C3.
E. Perez and C. Boles, “U.S. Fines British, Korean Airlines for Price
Fixing,” The Wall Street Journal, August 2, 2007, p. A6.
J. Diamond, “What’s Your Consumption Factor?” The Wall Street Journal,
January 2, 2008, p. A19.
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N. G. Mankiw, “One Answer to Global Warming: A New Tax,” The New
York Times, September 16, 2007, p. BU6
L. Abboud and J. Clevstrom, “Stockholm’s Syndrome,” The Wall Street
Journal, August 29, 2006, pp. B1, B8.
“The Rational Response to Terrorism,” The Economist, July 23, 2005, p. 72.
A. W. Mathews and J. Hechinger, “Are Too Many Unproven Drugs
Receiving FDA Early Approval? Process Comes Under Scrutiny,” The Wall
Street Journal, March 1, 2005, p. B1.
J. Tierney, “Life: The Cost-Benefit Analysis,” The New York Times, May 18,
2003, p. WK14.
R. Stavins, “Why not Trade Fishing Rights the Way Business Trades
Pollution Credits?” Forbes Magazine, April 28, 2003.
V. Postrel, “Setting Fuel-Efficiency Targets for Vehicle Fleets Makes Little
Sense,” The New York Times, December 6, 2001, p. C2.
Gary S. Becker, “Good-Bye, Tollbooths and Traffic Jams?” Business Week,
May 18, 1998, p. 28.
P. Passell, “The Tax Credit for Research and Development: a Free Lunch,”
The New York Times, February 5, 1998, p. D2.
Arthur Schlesinger Jr., “In Defense of Government,” The Wall Street
Journal, June 7, 1995, p. A14.
II. Longer Readings
P. Krugman, “Building a Green Economy,” The New York Times Magazine,
April 5, 2010, p. 34.
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W. K. Viscusi, “How to Value a Life,” Journal of Economics and Finance,
Vol. 32, October 2008, 311-323;
J. Baker and T. Bresnahan, “Economic Evidence in Antitrust: Defining
Markets and Measuring Market Power,” in Handbook of Antitrust Economics,
P. Buccirossi (Ed.) 2008.
R. Kuttner, “The Copenhagen Consensus: Reading Adam Smith in Denmark,”
Foreign Affairs, March-April 2008.
M. Coate, “Economic Models and the Merger Guidelines: A Case Study,”
Review of Law and Economics, Vol. 2, 2006, 53-84.
K. Arrow et al, “Are We Consuming Too Much?” Journal of Economic
Perspectives, September 2004, pp. 147-172.
W. K. Viscusi, “Economic Foundations of the Current Regulatory Reform
Efforts,” Journal of Economic Perspectives,” Summer 1996, pp. 119-134.
C. Winston, “Economic Deregulation: Days of Reckoning for
Micro-economists,” Journal of Economic Literature, September 1993, pp.
1263-1289.
Charles Schultze, The Public Use of Private Interest, The Brookings
Institution, 1977. (This classic is a very readable treatment on market
failures and efficient regulatory remedies.)
III. Cases
Aviation Security after September 11: Public or Private? (9-702-021),
Harvard Business School, 2004.
Antitrust Regulations in a Global Setting: The EU Investigation of the
GE/Honeywell Merger (9-204-081), Harvard Business School, 2003.
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A Note on Antitrust and Competitive Tactics (9-703-493), Harvard Business
School, 2003.
Price-Fixing Vignettes (9-902-068), Harvard Business School, 2002.
Forever: De Beers and U.S. Antitrust Law (9-700-082), Harvard Business
School, 2000.
Microsoft Corp.’s Pricing Policies (9-795-173), Harvard Business School,
1996.
New Jersey Solid Waste Crisis (9-792-002), Harvard Business School, 1992.
Teaching Note (5-793-026).
Many cases involving regulation, public goods, and benefit-cost analysis are
available from the John F. Kennedy School of Government, Harvard
University. These include:
Buenos Aires-Colonia Bridge: The Project (#1400.0 & 1400.1) Harvard
University JFK School of Government, 1997.
Implementing Electronic Road Pricing in Singapore (#1520.0 & 1520.1)
Harvard University JFK School of Government, 1999.
Congestion Relief at Boston’s Logan Airport: Options and Controversies
(#1341.0) Harvard University JFK School of Government, 1996.
Post Office Square Park (#1231.0 & 1231.1) Harvard University JFK School
of Government, 1993.
Dulles Toll Road Extension (#1276.0) Harvard University JFK School of
Government, 1995.
Bridge over the Tempisque River (#1292.0) Harvard University JFK School
of Government, 1995.
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High Speed Rail Between Boston and New York (#1022.0) Harvard
University JFK School of Government, 1991.
West Side Highway Proposal (#876.0) Harvard University JFK School of
Government, 1989. Teaching Note (876.2)
Massachusetts Water Resources Authority (#702.0) Harvard University JFK
School of Government, 1986.
The Department of Transportation and Airport Landing Slots (#781.0)
Harvard University JFK School of Government, 1987. Teaching Note
(781.2)
IV. Quips and Quotes
When you can measure what you are speaking about and express it in
numbers, you know something about it. Otherwise your knowledge is of a
meager and unsatisfactory kind. (Lord Kelvin)
The age of chivalry is gone; that of sophisters, economists, and calculators
has succeeded. (Edmund Burke)
Generally speaking, there is no one who knows what is in your interest so
well as yourself. (Jeremy Bentham)
For every action, there is an equal and opposite government regulation.
Under capitalism, man exploits man. Under socialism, it’s just the reverse.
When the last of the bourgeoisie has been hanged, a capitalist will sell the
rope.
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The world will always be governed by self-interest. We should not try to
stop this. We should try to make the self-interest of cads a little more
coincident with that of decent people.
Govern a nation as you would cook a small fish — do not overdo it.
No more good must be attempted than the people can bear. (Thomas
Jefferson)
The man who believes in “laissez faire” would allow his garden to run wild
so that the roses might fight it out with the weeds and the fittest might
survive. (John Ruskin)
The business of America is business.
Law (government) is like sausage. If you like it, you shouldn’t watch it
being made. (Chancellor Bismarck)
Government creates scarcely anything. A government could print a good
edition of Shakespeare’s works. But it could not get them written. (Alfred
Marshall)
One cabinet minister, two agency heads, and three congressmen wired in a
series produces near infinite impedance.
He’s the kind of politician who could cut down a redwood tree, climb the
stump, and make a speech about conservation.
(Adlai Stevenson about Richard Nixon)
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