Flying the friendly skies Fiche PDF

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Flying the friendly skies? The market for airplane Even though competition has brought lower airfares; and a rise in the amount of air travel, the safety record of U.S. airlines has continued to improve over time. Perhaps this is because the market punishes “unsafe behavior” (e.g., crashes) by airlines by lowering the market value of the firms responsible for crashes. Marginal cost and marginal benefit of safety We live in a world of scarcity  to get more of a good, we need to sacrifice on some other goods. Safety confers benefits (ex: we live longer) but achieving it also entails costs (ex: we must give up something to obtain that safety). As safety rises, the total benefits of safety rises, but the marginal benefits (MB) of additional safety declines. Ex: the more safety doors in a plane, the less additional safety per additional door. As safety rises, both the total and marginal cost (MC) of providing safety rises. Ex: as the number of additional fuel gauge in an airplane increases, the new fuel gauge is at least as costly as the first. However, the second has a smaller positive impact on safety than the first. Thus, the MC of the second fuel gauge is higher than the MC of the first. The economically efficient level of safety occurs when the MC of increasing safety just equals the MB of that increased safety.

Note that total benefits rise at a decreasing rate; that is, each additional “unit” of safety provides less value than the previous unit. Conversely, as safety rises, total costs increase at an increasing rate: not only do the total costs of safety rise, but so do the incremental costs of each additional unit of safety. These facts are mirrored in the graph in the bottom half of the figure, which depicts:  the declining marginal benefits of safety (MB = TB/S);  and the rising marginal costs of safety (MC = TC/S). The efficient amount of safety is:  at a level where the difference between total benefits and total costs (the distance AB) is greatest;  which also corresponds to the level where marginal cost and marginal benefit are equal. Thus, the efficient level of safety is at S*. Who should decide on the appropriate level of safety? Changes in circumstances can alter the efficient level of safety. Ex: - Technological change reduces the cost of bomb-scanning equipment  the MC of increasing airplane safety decreases. - If the USA’s president is on board, the MB of safety rises. If information were free, consumers would themselves decide the degree of safety they want to undertake according to their budget and preferences. However, information is a scarce good costly to obtain.  Who should decide on the efficient level of safety then? - The airplane companies alone o Pb: as safety is costly, it’s likely that they would somehow minimize it up to a certain point. - The government, through the Federal Aviation Administration (FAA) o Pb: the FAA would need the know the value that people place on additional safety to compute MB and MC. This information is very hard to get. - The consumers o Pb: irrationality  most people fear most the plane than the car despite the fact that the planes are actually way safer.  They would not base their degree of desired safety on rational measures....