Reference no: EM132253925

You are an auto manufacturer entering the electric car market. The design and tooling of the vehicle are complete, and production has started. You want to sell the car at an affordable price, say $24,000. Recently, however, one of your engineers discovered a design flaw in the vehicle. Hitting a large bump in the road will cause the car to immediately stop. This creates a danger in traffic, which you estimate will lead to three additional deaths per year. Fixing the design flaw will add $2,000 to the cost (and price) of each unit sold. How might you proceed based upon the principles of benefit-cost analysis? Some additional assumptions: You have estimated that the additional cost per vehicle multiplied by the number of vehicles produced is less than the actuarial (life insurance) value of the three lives lost according to VSL (value of statistical life - the value placed on changes in the likelihood of death, not the price someone would pay to avoid certain death; the US Department of Transportation values it at $9.6 million in their last publicationin 2016) You are a publicly traded company and face the pressures of shareholder expecations to maintain a high stock price, which could be negatively affected by any negative publicity or press or setback, or, really anything. You know that the the National Highway Traffic Safety Administration (NHTSA) would mandate a recall to fix the problem at some future time and that there is generally a 50% rate of returns. You expect that adding $2,000 to the price of each car will lead to at least 1500 potential customers being priced out of this market. This creates a loss in overall welfare and an undue burden on those who are now priced out of the market.