After lithium-ion batteries burned on 2 separate Boeing 787’s,
the Federal Aviation Administration launched a large investigation and grounded
all 787 planes. The FAA is certainly doing its job in reviewing 787’s and
trying to keep air passengers safe, but there is little reason to think that
the FAA is helping and many reasons to conclude that they are overreacting.
If the FAA
fails to react to a potential safety threat, their bureaucrats will quickly
find themselves being scrutinized before congress. However, by taking on risk
and letting an aircraft continue to operate, the FAA stands to gain nothing.
This incentive structure biases the agency towards more safety inspections.
While an
overly cautious ‘airplane-safety-inspector’ doesn’t sound like a bad idea, without
having to consider the costs of their actions the FAA could easily leave us
worse off. FAA inspections require consumers to contribute tax dollars to fund
the agency, and require airline corporations to divert time and resources to
comply with the safety rules, which require airlines to raise ticket prices, yet
FAA doesn’t have an incentive to consider any of these costs when deciding to
launch a safety inspection that grounds a fleet of airplanes.
Certainly
safety inspections are a good thing. Air travel consumers simply do not have
all the information necessary to decide whether or not an aircraft is safe. Slightly
increased prices might be worth added safety, but the costs of grounding a
fleet of airplanes for a small technical problem might not be worth it. There
is some optimal amount of safety regulation, but what that amount is, is not
knowledge that exists in any single individual.
Just
because the optimal amount of safety regulation doesn’t exist in one person
does not mean the knowledge is unobtainable. In fact, lots of dispersed
knowledge about costs, benefits, and consumers’ preferences is constantly communicated
via the price system. Unfortunately, the FAA doesn’t have any kind of ‘prices’
to look at when determining the costs and benefits of their decisions.
Private
safety inspectors or insurance companies could easily provide safety inspection
services to airlines just like the FAA does. An airline could contract with an
insurance company that would only agree to insure its planes and put its stamp
of approval on that airline’s services if the airline met all the insurance
company’s requirements. The scrutiny of one’s insurance company could be
something airlines could use to brag about to customers. Plus, private
companies seeking to maximize profits would seek to innovate new ways to ensure
safety while cutting costs. If the safety requirements imposed by one insurance
company were so rigorous that the cost of the insurance raised the price of the
tickets beyond what consumers were willing to pay, consumers would choose a
different airline; ultimately competition would allow us to discover the
optimal amount of safety precaution that consumers want airlines to take.
There is no
distinctive feature of the FAA’s safety inspections that necessitates it be a
government action. While private inspections done by insurance companies could
contain errors, it is less likely because as a private company their existence
depends on their effectiveness. It’s unclear if its worth grounding all 787’s
and passing along all the costs of doing so to American citizens just because
of problems in two batteries, but the incentives that FAA bureaucrats face show
us that this is almost certainly a sub-optimal decision. However, we can say
with certainty that public, monopolized safety inspections of airplanes will be
more costly and lead to less safety than safety services provided by a private
market.
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