Academic journal article
By Dunham, Wayne R.
Economic Inquiry , Vol. 35, No. 3
From 1972 to 1991 changes in safety regulations increased the cost of building new automobiles by $900. Over this same period emission control regulations increased the costs of new automobiles by $1400. This paper develops and estimates a model that tests whether consumers valued the effects safety regulations had on the safety of vehicles by comparing the effects of changes in safety regulations on used vehicle prices to the effects of changes in emission control regulations.
Changes in emission control regulations have only one immediate impact on the used vehicle market. As consumers attempt to substitute the now relatively less expensive used vehicles for the new vehicles, the prices of used vehicles are bid up. Safety regulations cause this same substitution effect, but, assuming they are effective, they also increase the relative value of owning new vehicles (due to the latter's increased safety). This second effect depresses the prices of used vehicles, so a change in the costs of new automobiles due to a change in safety regulations has a lesser impact on the prices of used vehicles than does a similar change in the costs of new automobiles due to a change in emission control regulations. If the second effect is stronger than the first, the prices of used vehicles will fall in response to the change in safety regulations. As shown in section II, this implies that the change in safety regulations increases social welfare.
The empirical model, discussed in section III, can differentiate between two possible valuations consumers may place on safety regulations. If the effect of changes in both emission control and safety regulations on the prices of used vehicles are identical, then consumers place no value on safety regulations. If increases in safety regulations decrease the prices of used vehicles, then consumers value the safety induced by these regulations more than their costs. The empirical results presented in section IV show that used vehicle prices fall in response to an increase in mandated safety, implying that consumers value the safety induced by safety regulations more than the additional cost imposed by these regulations. This has the surprising implication that the implementation of the safety regulations resulted in an overall Pareto improvement in social welfare.
The new and used car markets are assumed to be competitive with the cost of building a new car, MC, a constant given by the sum of a per-vehicle cost, V, the cost of emission controls, E, and the cost of safety, S. All automobiles with a given safety level, S, produce the same level of service regardless of age and are scrapped at an age of T with a scrap value of zero. Consumers are identical with income, I, discount rate, r, and own exactly one vehicle. They derive utility from automobile consumption and from a generic consumption good, g. Because clean air is assumed to be a public good, the utility derived from the automobile is dependent only on the vehicle's safety. This utility is given by d(S) with d[prime](S) [greater than] 0 and d[double prime](S) [less than] 0. The price of using a vehicle for one period is its rental value. In equilibrium, it is a function of the level of emission controls and safety built into new vehicles, [C.sup.n] and [S.sup.n], respectively, and the vehicle's own safety level, S, and is given by R([C.sup.n], [S.sup.n]; S).(1) The utility from the generic consumption good is given by f(g) with f[prime](g) [greater than] 0 and f[double prime](g) [less than] 0. The price of the generic consumption good is assumed to be one giving the following utility function for consumers, U = f[I - R([C.sup.n], [S.sup.n]; S)] + d(S), where total expenditure on the generic good is equal to I - R([C.sup.n], [S.sup.n]; S).
In a steady-state equilibrium, competition ensures that the expected present value of the rental values of the vehicle equals its marginal cost of production (as well as its price). …