Why the Market Did Not Encourage It and How It Might Be Made to Do So

PREFACE The purpose of this report is to explore the economics of vehicle safety, an area heretofore apparently neglected by economists. In addition, the report suggests fruitful research areas for the NHSB that could contribute to providing greater economic incentives for vehicle safety. Wolf for their helpful comments and criticisms.-ii-SUMMARY This report examines four topics: the relative merits of market versus administrative determination of auto safety standards, why the free market has not promoted vehicle safety very rapidly, how vehicle safety might be promoted through the market mechanism, and the research implications of the analysis for the NHSB. Theoretically, administrative determination of auto safety standards could be carried out either through detailed component standards, as at present, or through overall vehicle safety performance standards. Component standards result in the most rapid progress toward established ends, but allow less flexibility than either overall performance standards or the free market for optimization of safety systems with respect to available technology, cost, and individual preferences. If component regulation is pursued, those innovations with a high relative owner-to-manufacturer cost of installation, (hose requiring only a passive participation by the user, and those that benefit others beside the user are preferable candidates for regulation other things equal. The free market has not promoted vehicle safety design changes primarily because the manufacturers have not believed such changes to be profitable for themselves and because the general pub lie has not shown sufficient interest in safety features to make it profitable for the manufacturers to attempt to satisfy this demand. To the extent that this public apathy is not justified, it may be explained largely in terms of a lack of information on safety performance and faulty evaluation of the benefits of increased vehicle safety. If more reliance were placed on the market mechanism, vehicle safety could be promoted by eliminating these two problems. The former can be eliminated most easily by the introduction of hierarchical safety standards for vehicles that would permit buyers to readily judge their relative safety. The latter might be eliminated by some of the self-insurance schemes currently discussed as an alternative to the present purely liability approach to automobile insurance.-iii-The principal research implication concerns further work on developing a practical set of hierarchical standards.