The Joy of Economics:  Making Sense out of Life
 Robert J. Stonebraker, Winthrop University
 

Saving Lives Can be Dangerous

            Guns aren't lawful, nooses give,

                        Gas smells awful, you might as well live.

                                                                                    .....Dorothy Parker

            In the halcyon days of my youth, I suffered repeated tennis thrashings at the hands of my friend Jimmy.  A brilliant, albeit mercurial player, Jimmy had a nasty habit of smashing his wooden racquet¹ against hard surfaces when his serves and volleys failed to behave appropriately.  The consequent result was a succession of fractured frames.

            No matter.  Jimmy's parents always came through with the funds for a new racquet.  Of course, that explains why he was willing to unleash his temper at the drop of a double fault.  Jimmy never wanted to break his racquets; there always was a transitional between-racquets phase he disliked.  However his parent's pocketbook provided an insurance policy that minimized his potential loss.  It's simple economics.  When parents lower the cost of broken racquets, the quantity of broken racquets produced will rise.  

Moral hazard

            If insuring against racquet breakage increases the number of broken racquets, might other insurance programs have similar effects?  Of course. Insurance companies are all too familiar with the quandary.  Insurance alters incentives.  Once we are heavily insured against an adverse event, we have less incentive to avoid that event. 

            It is the problem of moral hazard.  When the insured no longer bears the full cost of a disaster, fewer precautions will be taken and the likelihood of disaster increases.  For example, theft insurance might induce us to take fewer safeguards with our valuables.  Similarly, government flood insurance might allow victims to rebuild homes on flood plains where they are likely to be re-flooded.

            The more heavily we insure against an event, the more likely that event becomes.  When urban riots lowered inner-city property values in the late 1960s, many undamaged buildings ended up with market values that were significantly below their insured values.  At the same time, urban fire losses rose rapidly.²  Was it a coincidence?  Or was it moral hazard in action?

            Insurance companies try a variety of ways to combat the problem.  A company that offers fire insurance might require safety inspections and threaten to drop coverage for those not meeting certain standards.  Offering discounts for homeowners who take such precautions as installing smoke alarms also is common.  Using deductibles and co-payments that force insured individuals to bear part of the cost of accident or theft can help as well.  If I must pay the first $500 of a loss out of my own pocket, I'm more likely to be careful.   However, as long as insurance bears part of the cost, part of the problem will remain.

            That theft insurance might lower precautions against potential burglary is relatively easy to see.  But does the problem extend beyond property insurance?  What about harm to life and limb?   Might people with heavy health and life insurance behave more recklessly than those without?  Does moral hazard extend to life and death decisions? 

Saving lives

            It does.  When the cost of harm goes down, people's willingness to risk life and limb goes up.  Suicide offers an extreme illustration.  To avoid problems of moral hazard, firms routinely exclude life insurance claims for individuals committing suicide.  But other, less obvious, examples abound.

            Few actions seem so noble as rescue operations.  Workers, often unpaid volunteers, risk their own lives to pull injured or stranded victims from countless perils.  Is it worth it?  What if rescue operations reduce the risk of dangerous activities?  What if the expectation of rescue induces more people to engage in risky behavior?  Might the expectation of Park Service rescue encourage more ill-prepared hikers to venture into dangerous back country?  Might Coast Guard rescues encourage more boaters to sail more brazenly into the open sea under storm clouds?

            The impact of such rescues could be perverse.  Suppose rescue operations lower the risk of mountain climbing by 40 percent.  The increase in perceived safety will raise the demand for climbing mountains.  More people will climb and probably take fewer precautions when they do.  The net effect is ambiguous.  If the increase in risk-taking is less than 40 percent, the rescue operations will lower overall fatalities.  However, if the increase in risk-taking exceeds 40 percent, fatalities will rise.  Rescues lower the probability that any single individual will die, but if the number of climbers increases enough, total fatalities increase.  Well-intentioned rescues can kill.

            According to economists J. R. Clark and Dwight Lee, government attempts to rescue climbers on Mt. McKinley illustrate the point.³  Prior to rescue attempts, only the most expert and best-prepared mountaineers braved its slopes.  And in the initial years, none died.  When deaths did begin to occur, the government responded with increasingly aggressive rescue efforts. The result, unfortunately, was more and more poorly prepared climbers, and more deaths.

            At least one professional guide blames a change in attitude.  Initially, "...there was more of an understanding that people were on their own.  They didn't rely on others for help.  But, [after] word got out that the National Park Service would pay for rescues, the prevailing attitude seemed to be 'Don't worry.  If we get in trouble, the Park Service will rescue us.'"⁴  The advent of cell phones has aggravated the problem.  Not long ago, a 59-year-old man fell while climbing a Welsh mountain by himself.  Too badly injured to move, the man placed a phone call to the regional police who, in turn, dispatched a Royal Air force helicopter that honed in on his cell phone signal to locate the stranded man and complete the rescue.⁵  Similarly, after three inexperienced college students were rescued after becoming lost in a Texas cave, one explained that they did not worry because they knew they could count on being rescued as a result of having left cell-phone messages for friends and a trail of litter on their way into the cave.  Another, undeterred by the expensive man-hunt and community trauma he had caused, commented that he planned on returning to the cave at a later date.⁶

            Unfortunately, such rescue efforts chew up scarce public resources.  Oregon, where local officials often are called to pull stranded climbers from Mt. Hood, is among a small handful of states that asks those rescued to share the costs.  But the maximum charge is a mere $500 for searches that can cost more than $6,000 per hour.⁷  Might taxpayers might save more lives per dollar if such resources were shifted to alternative programs such as infant nutrition?  Maybe.

Safety regulations

            Government safety regulators suffer similar dilemmas.  If regulations make our products safer, they might also induce us to take more risks with them.  Safer power saws will help little if they simply create more and less-cautious users. 

            There is evidence that drivers become more aggressive when protected by anti-lock brakes, seat belts⁸ and air bags.⁹  Safety caps have not solved the problem of accidental aspirin-related poisonings. Imaginative toddlers can defeat the protective mechanisms, and consumers, lulled into a false sense of security, are more apt to leave medicines with safety caps where children can reach them.¹⁰  Despite massive efforts, the Occupational Safety and Health Administration has had little apparent impact on overall workplace safety.¹¹  Offsetting worker behavior could be a contributing factor.

            Saving lives is an admirable ambition, but be careful.  When we change the costs or probability of harm, we also change people's behavior.  Saving lives can be dangerous.

_________________________________________

Notes:

1.         In my distant, pre-composite past youth, all tennis racquets were constructed of wood.

2.         See Stiglitz, Joseph E., Principles of Microeconomics, 2nd edition, W.W. Norton, New York, 1997, page 135.

3.         Clark, J.R. and Lee, Dwight R., "Too Safe to be Safe:  Some Implications of Short- and Long-Run Rescue Laffer Curves," Eastern Economic Journal, volume 23, #2, Spring 1997, pp. 127-137.

4.         Guide Jim Hale quoted in ibid. page 129.

5.         "Injured climber saves life with cell phone," Indiana Gazette, May 21, 2001.

6.         Ross, Winston, "The Price of Survival," Newsweek, web edition, February 20, 2007.

7.         "Texas Cave Rescue," WJBF.Com web news, October 18, 2007

8.         "A Hazardous comparison", Economist, March 1, 2008, pp 61-62.

9.         Peterson, S., Hoffer, G. and Millner E., "Are Drivers of Air-Bag Equipped Cars More Aggressive?  A Test of the Offsetting Behavior Hypothesis," The Journal of Law and Economics, October 1995, pp. 251-264.

10.       Viscusi, W. Kip, "The Lulling Effect:  The Impact of Child Resistant Packaging on Aspirin and Analgesic Ingestions, American Economic Review, volume 74, #2, May 1984, pp. 324-327.  In addition, because safety caps are so bothersome to adults, especially those with arthritis, the medicines are more likely to be left open.

11.       See Viscusi, W. Kip, Vernon, John M., and Harrington, Joseph E., Jr., Economics of Regulation and Antitrust, 2nd edition, MIT Press, Cambridge, MA, 1995, pp. 816-824.

_________________________

Testing Yourself

To test your understanding of the major concepts in this reading, try answering the following:

1.         Explain the concept of moral hazard and discuss examples.

2.         How do insurance companies try to combat the problem of moral hazard?  Explain.

3.         Explain the implications of moral hazard for the effectiveness of government regulations designed to promote safety and health and give examples.

Return to Contents