Monday, October 03, 2011

The Tale of the Evil Car Company (Part 1 - Question of Policy)

Suppose one day a major automobile publicly listed company announces that it is selling a new cheap product that will allow people to have car more easily (for the sake of discussion, we will not discuss the externalities that people will face with more cars in the road).  The car is a huge success for the company, generating a huge profit, and the stocks' value of the company has also increased several times in a year. But then, an accident happens, a gruesome one. Further independent investigation shows that while the probability of the accident is very low, around 1:100,000 per year, it can be avoided if only the company install a safety device.   

Facing this result, the company announces to the public that to cut the costs of the car, it did not install the safety device required for preventing such accident. Why? Apparently, the cost for installing the safety device is around US$10 per car and since they produce 2,500,000 car a year, the total additional costs that the company will bear for a year is US$25,000,000. Meanwhile, by attaching a value of at least US$100,000 per person as a compensation for each accident and with the assumption that the car will be purchased entirely, the company estimates that the total costs of the accident per year wouldn't be more than US$2,500,000. So, by a simple cost and benefit analysis, the best option of the company would be not to install such safety device.

Soon this controversial information fills all the major newspapers. The enraged citizens are calling this company as an evil car company, and politicians demand the company to be responsible for such matter. Assuming that you are a policy maker, what will you do with this case? What kind of policy that you will formulate against the fact that the company has chosen not to install such safety device?

This is the first part of my post that deals with the basic question. I'll post my proposed policy but I would like to see first how my readers will respond to this kind of question. Your comments will be much appreciated.

8 comments:

imedh Monday, October 03, 2011 4:20:00 PM  

we had SNI,, and as long as i can remember, we still have it. With the very same basic, we can apply this to safety in vehicle production..The problem is, it will boost the vehicle's cost. And it will probably reduce customer.. Since Indonesia seems to lack off industrial commodity, it'll be look so bad..

Anonymous,  Monday, October 03, 2011 6:06:00 PM  

Evil Policy Maker: If there's a possibility i'll be elected next year, my choice would be follow the peoples' heart (or newspapers?), preparing regulation re. standard safety device for car which will cornered the company and force it to pay for installing the safety devise or worse total recall of car production. Or i can just make an arrangement with the company (maybe >20% shares or force its owner to loose its ownership) and blame the public for their unawareness of safety device when purchasing the car (u buy what u get people). Is it evil enough?

Anonymous,  Monday, October 03, 2011 6:23:00 PM  

Btw, your article is imaginary right?
In addition to my answer above and to be more evil my friend said for every car accident you shoot down the owner/management.*twisted fella*

Prasetya Dwicahya Monday, October 03, 2011 7:28:00 PM  

As a policy maker, he/she must have a purpose for what the policy is made. For me, in this case, the policy must be able to satisfy all the stakeholders: the people, the politicians, and the company.
I make the assumption that the installation of the safety device is not compulsory by law.
Therefore what I would like to suggest would be these:
1. Demand the company to offer a selective safety device installation program for people who want to install the safety devices in their car. (I make an assumption that the installation of the safety device can occur in any time, not necessarily must happen during the manufacturing process). So the company only install the device for the car owners who really want the safety device being installed in their car.

2. But at the same time, I would suggest the company to disclose the information that they will compensate those people who experience accident, but under one special condition. The company only compensates those people who do not have the safety device in their cars.

By using those points, I expect that:
1. The politicians will be happy since the company has followed their demand
2. The people also feel pleased since the company shows some concern to them.

Reputation is very important. If the company is so stubborn not to install the device therefore, it may be bad for its business.

Some simple quantitative analysis:
1. Let’s assume that after hearing that the company offer, 90% of 2,500,000 car owners come to the company and ask the company to install the safety device. Let’s say that the company charge them (it’s not free) but give them a discount for $5 (the company subsidizes the half of the installation cost). Therefore, the expected cost will be $11,250,000.

2. But don’t forget that the company also offers another attractive scheme: the compensation for those who experience the accident if the victims do not have safety device in their car. People are given choices to be completely safe or having a chance to win a “lottery” worth $100,000
This solution may have different effects if it is applied to different countries. Countries like Indonesia, Myanmar, Thailand has more ignorant people. They may choose to not install the safety device in order to get the better chance to receive $100,000 compensation. Countries like USA, or Western European countries may act differently. As a policy maker I try to help all the stakeholders to achieve their interests in this matter. And at least, the company does not have to pay $ 25,000,000 for reinstalling all the safety devices in the cars.

Anonymous,  Tuesday, October 04, 2011 10:09:00 AM  

why not just provoke the buyer to sue them for negligence, product liability and others?

car accident attorney los angeles Tuesday, April 17, 2012 1:32:00 AM  

Problem is the insurance companies are always making these cancellations hard and as inconvenient as possible for the policy holders. Having all the required documents in hand can make this process a little easier.

family lawyer perth Wednesday, April 18, 2012 10:31:00 AM  

In that case, the company should be sued every time there is an accident involving its cars. Even if it is just at a rate of 1:100,000 yearly, that is still a lot of money the company will have to shell out. That should teach the company that safety should always be a priority.

Lena Harris Thursday, May 17, 2012 1:33:00 AM  

If I were a policy maker, i'd require all these car manufacturers to install safety device in every vehicle that goes out of the production plant.

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