The economics of airline safety and security. Overview and explanation

If you've ever flown on an airplane you might have wondered how safe the airplane was and how regulatory agencies such as the FAA in the United States made decisions about how safe the airplane should be. So basically this is all about trade-offs when we think about airline safety because we could add an infinite number of safety features to planes we could do all kinds of different things as we could add backups to this or we could add extra pilots, we could have ten pilots on the plane just in case there's some kind of issue and one of the pilot's heart attack or just the extra expertise, we could do all these different safety features to try and make flying as safe as possible. From the firm's perspective or from the perspective of a regulatory agency however you want to view it as we're only going to want to add a safety feature if the incremental benefit that we get from that additional safety feature outweighs the incremental cost. An incremental benefit you'll sometimes hear is called the marginal benefit. So we make decisions in economics at the margin. We're gonna look at by adding an additional pilot what's the benefit and what's the extra cost and then if the extra benefit outweighs the extra cost then we should probably be doing that.

So let's think about it from the perspective of a firm and so you've got an airline and this airline says "We could have different numbers of pilots, we could have 1-5 pilots that we pay to be on this plane. Just in case there's some kind of issue but each time we add a pilot, we go from 1 to 2 or 2 to 3 the marginal cost of having an additional pilot is going to go up and up. Let me just show you how we'll graph it out and then make it a little more visual here for you. So this would be the marginal cost curve of adding an additional pilot.

Now the reason the marginal cost is going up and not just the average cost is because of the marginal cost of each additional pilot if you think about for example if you normally see like with a larger plane you have like two pilots on there, well what if we went to three pilots? Well not only do we have to pay an additional pilot, we don't just have to pay their salary and so forth but we might have to expand the size of the cockpit. Maybe the cockpit was only designed for two pilots and so when we go from 2 to 3 we've got two problems, we not only have to pay that additional pilot now we have to make some changes to the plane and so forth. We can say that the marginal cost of adding a pilot goes up. It goes up as we add more and more pilots.

So if we think about the marginal cost going up we can also think about the marginal benefit and what happens to the marginal benefit? So the marginal benefit to having one pilot instead of zero is huge, we can think of it way up there basically you don't want to be on a plane that doesn't even have a pilot. So we'll just let's say the marginal benefit of one will put it here at point "A" and then as we go to more and more pilots the incremental benefit or the marginal benefit from adding an additional pilot gets smaller and smaller. If you just think about it you know theoretically that if we had zero pilots nobody would want to fly at all because it wouldn't be safe. We go from 0 to 1 there's a huge benefit but so we got our marginal benefit curve up here and I know it's kind of hard to think about marginal benefit in terms of dollars or whatever but just bear with me. So as we go from 1 pilot to 2 there's an incremental benefit, I mean if the pilot one has a heart attack or maybe it's just good to have a second person there to kind of help out, they've got some extra experts parties. As we go now, we get to the third pilot we've already got two pilots so we've got two pilots and now we go to a third pilot, is the third pilot helping that much? You say "Well you know maybe it's a really wise pilot and it's great to have three just in case but we need to make a decision."

How many pilots are we going to have on this airplane? Now you know we do all these different things to accommodate these pilots so the marginal cost is going up but the marginal benefit is going down. If you think about it for example we don't want 40 pilots on the plane, now that probably a very safe plane in terms of we've got a lot of expertise and wisdom up there but the marginal benefit is going down and we might even think that the pilots are having disagreements. The more that we have the marginal benefit of adding the safety feature of having more pilots go down and the marginal cost is going up. So the point there's a point where we get to if I was a map this out with a marginal benefit the marginal benefit equals the marginal cost that would be the point that we want which is 2

Now I've kind of framed this all from the perspective of an airline but some of you might be asking yourself "Well wait a minute, in terms of safety if we're thinking about safety you know how many customers of airlines go and actually check the safety record of the airplane?" So when you're going to buy an airline ticket, when you go to buy your ticket you're probably looking at price. You maybe even just assume that all airplanes are equally safe or you just figured that before you get on an airplane you don't go and talk to the mechanic and say "Hey when was the last time you inspected this airplane? I want to make sure that it's safe." So you don't really have the ability to kind of check as much. So the airline has an incentive to reduce the number of crashes certainly but now we might say well you know we might actually want some expertise we might want government agencies like the FAA and the United States or whatever, your country is then probably has a regulatory agency that regulates airplane safety and says "Look we need to look and think about the marginal social benefit." because the only thing about from this perspective a firm they're looking at the marginal benefit and the marginal cost but we need to think about from society's perspective what would be optimal is to have where the marginal social benefit is equal to the marginal social cost. 

Because the firm is going to optimize their marginal private benefit to the firm where that's equal to the marginal private cost to the firm but actually what's optimal will be when we're we have an amount of safety that with a marginal social benefit to everybody, not just the airline is equal to the marginal social cost of whatever safety feature.

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