The government is considering a regulation which would require a more stringent

Question

The government is considering a regulation which would require a more stringent safety standard for passenger cars. The regulation imposes upfront costs on the industry in the amount of $100 million, as well as an increase of $300 dollars in the price of each vehicle sold. Assume 1 million vehicles will be sold every year. However, the government estimates that the regulation will reduce the annual risk of death from 1/100,000 to 1/200,000 for all drivers (not only the new vehicle buyers). In total, there are 10 million drivers affected by the regulation annually. The regulation is going to be effective immediately and is estimated to be in place for 20 years. How many "statistical lives" are saved each year by the regulation? Fill in the following table: Since regulations are effective immediately, 50 lives are saved every year, starting at t=0 (first year of the program). For computing each PV- Develop a spreadsheet in Excel, with your columns being: time (year 0 to year 19), then benefits (VSL * "statistical lives saved"), costs, net benefit, and discounted net benefit (NB/(1 + r)^t). Sum up the discounted NBs across all years and enter the numbers in the table. You might as well include your spreadsheet when you turn in the assignment, but it's not required. Discuss your results. What would your recommendation be as far as implementation of this regulation goes?

Explanation / Answer

a.

Number of drivers per year = 10 million

Risk of death before the regulation = 1/100,000

Number of death before the regulation = Number of drivers per year × Risk of death before the regulation

                                                                   = 10,000,000 × (1/100,000)

                                                                   = 100

Risk of death after the regulation = 1/200,000

Number of death after the regulation = Number of drivers per year × Risk of death after the regulation

                                                            = 10,000,000 × (1/200,000)

                                                            = 50

Number of statistical lives saved in each year = Number of death before the regulation - Number of death after the regulation

                                                                        = 100 – 50

                                                                        = 50 (Answer)

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