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Unformatted text preview: Lecture Note #13: Risk, Safety Regulation and the Value of a Statistical Life David Autor 14.03, Applied Microeconomic Theory and Public Policy, Fall 2005 1 Risk and Safety Regulation & We have so far studied risk as an individual-level consumer problem. But it is also a societal problem. & How much risk should we subject ourselves to? Alternatively, how much safety should we de- mand? And how much are we willing to pay for it? & Let&s be clear: safety is a ¡good&and we buy it by giving up other things (time, adventure, money, convenience). The notion that ¢the more safety the better£ (or ¢safety ¤rst£) is not a sound economic concept. Ultimately, there is an optimal level of safety (for an individual or a society) and we could consume either too little or too much. & We will take three angles of attack on this question. 1. We& ll ¤rst consider product safety and liability law. Some very simple models establish how the market might optimally make choices about safe products, and how the legal regime (speci¤cally, liability law) a/ects the level of safety provided by the market and who bears the cost. 2. We& ll next consider reasons why the market might not provide the optimal level of safety, and consider possible public policy responses to these ¡market failures.&These include: (a) Private mechanisms (these are actually a market response) including information pro- vision, warranties and reputation (b) Licensing requirements (c) Facilitating provision of information (d) Requiring provision of information (e) Establishing legal liability standards (f) Limiting or banning products 1 3. We& ll ¡nally consider an interesting empirical evaluation of the willingness of society to pay for safety (at the margin). This is the paper by Ashenfelter and Greenstone, ¢Using Mandated Speed Limits to Measure the Value of a Statistical Life.£ 2 Legal liability & It&s useful to start with a few simple legal concepts. & Let&s say that there is a product that gives utility U > and has probability p > of harming the buyer with monetized damages of d > . Assume that U > MC + pd , where MC is the cost of production. Consumers would purchase this product, despite the risk of harm. & Question: Although consumers would be willing to buy the product ¤as is,& should (normatively) the manufacturer make the product safer? The answer depends on the manufacturer&s cost. & Assume the manufacturer&s cost of making the product completely safe is b > . Clearly, if b < pd , economic e¥ ciency demands that the manufacturer should do it. & Next question: Will the manufacturer make the product safer if it is economically e¥ cient for her to do so? The answer to this question may depend on the legal liability regime....
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