Economic Analysis of Social Issues 1st Edition by Alan Grant

Exercise 4

A tire manufacturer estimates that the probability of a fatal accident caused by the design of its product is 1/90,000 and further estimates that the value of a life lost is $3 million. Themanufacturer can change the design to eliminate that chance for $40 per tire, and it stands ready to incorporate all cost-justified precautions. Will me manufacturer change the design? What would the benevolent social planner think about the manufacturer's decision if the true value of a life is not $3 million but $5 million?