A manufacturer of grenade launchers estimates that the probability of a fatal accident caused by the design of its product is 1/80,000 and the value of a life lost is $2 million
The manufacturer can change the design to eliminate that chance for $20 per grenade launcher and is prepared to incorporate all cost-justified precautions. Will the manufacturer change the design? What would the benevolent social planner think about the manufacturer's decision if the true value of a life is actually $1.5 million?
The manufacturer's estimated death cost per grenade launcher is: $2,000,000 × (1/80,000 ) = $25.
The cost of changing the design is $20 per grenade launcher.
Since the estimated death cost is more than the cost of changing the design, the manufacturer will change the design.
The true death cost per grenade launcher is: $1,500,000 × (1/80,000 ) = $18.75.
The cost of changing the design is $20 per grenade launcher.
Since the true death cost is less than the cost of changing the design, the benevolent social planner would advise the manufacturer not to change the design.
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