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Unformatted text preview: Lecture Note 15: Risk, Safety Regulation and the Value of a Statistical Life David Autor, Massachusetts Institute of Technology 14.03/14.003, Microeconomic Theory and Public Policy, Fall 2010 1 Risk and Safety Regulation [Most of this material in this subsection is for self-study and will not be covered or tested in class.] 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 demand? And how much are we willing to pay for it? Lets be clear: safety is a goodand 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 es- tablish how the market might optimally make choices about safe products, and how the legal regime (specically, liability law) aects 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 provision, warranties and reputation 1 (b) Licensing requirements (c) Facilitating provision of information (d) Requiring provision of information (e) Establishing legal liability standards (f) Limiting or banning products 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 Its useful to start with a few simple legal concepts. Lets 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 (nor- matively) the manufacturer make the product safer? The answer depends on the manu- facturers cost. Assume the manufacturers cost of making the product completely safe is b > . Clearly, if b < pd , economic e ciency demands that the manufacturer should do it....
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- Fall '10