The Ford Pinto Example
When Ford Motor Company performed a cost-benefit analysis to determine the benefits and cost relating to the fuel leakage associated with static rollover tests portion of the FMVSS 208 (Ford "Pinto"), it failed to make conservative accounting estimates of the worst-case scenario. In 1970, Ford used $200,000 as the cost of a life (provided by the National Highway Traffic Safety Administration (NHTSA)); the value was based almost entirely on deferred future earnings (DFE).
At the time this decision was made, there were at least three different DFE-based figures ranging from $200,000 to $350,000 being used by as many different Federal agencies. Willingness to pay (WTP) has since replaced DFE as the preferred method of assessing the value of life. Further, research has shown that various WTP studies have revealed a higher median value than the one used by Ford. On the basis of this research, the value of a life is greater than future earnings.
The Ford cost benefit analysis presented a $137 million cost and $149 million benefit. In the formula, the number of deaths, the cost per vehicle to make the design change, and the proportion of deaths to be attributed to small light vehicle were all subject to such dramatic change that the $2.75 cost to $1.00 benefit ratio achieved could have easily been changed so that the benefit exceeded the cost even if the value of life used was accepted and left unchanged.
The formula Ford used was as follows:
Savings: 180 burn deaths, 180 serious burn injuries, 2100 burned vehicles
Unit Cost: $200,000 per death, $67,000 per injury, $700 per vehicle
Total Benefit: ((180 x $200,000) + (180 x $67,000) + (2,100 x $700)) = $49.5 million
Sales: 11 million cars, 1.5 million light trucks
Unit Cost: $11 per care, $11 per truck
Total Cost: ((11,000,000 x $11) + (1,500,000 x $11)) = $137 million
The cost benefit analysis performed by Ford on crash induced fuel tank leakage and fires presents a startling example of the imprecision of cost benefit analysis, as well as, the strong possibility for manipulation of figures to achieve a desired result.
By using the high estimated death figure from the NHTSA, the benefit total would have been $161.2 million, even if everything else would have been held constant. By using the low estimated death figure of $5.08, the figure would have been $63 million. If only small cars had been used rather than all automobiles and light trucks, the cost figures would have been lower still. Increasing the value of life would have further skewed the results. In retrospect, the design changes would have been made based on a conservative accounting estimate rather than a liberal estimate.
What is life worth today? Various federal regulatory agencies value life differently when determining the cost-benefit of a new rule, as follows:
|Agency||Value in Millions|
|Consumer Product Safety Commission (CPSC)||$2M|
|Environmental Protection Agency (EPA)||$8M|
|Nuclear Regulatory Commission (NRC)||$5|
|Office of Management & Budget (OMB)||$1M|
The total cost to implement a new rule is divided by the number of lives expected to be saved as a result. For example, if a new rule is estimated to cost $100 million to implement and it is expected to save 20 lives, the rule is too expensive for CPSC, OSHA and OMB, but acceptable for EPA and NRC. It seems that the federal government values life more than some workers value their own lives. If employees are killed while they deliberately violate safety rules, the workers' compensation payments are nowhere near these amounts.
When conducting a cost-benefit analysis, one may choose to use a particular agency's numbers depending what is being justified. For example, if you are justifying expenditure on the basis of OSHA, you would want to use $3.5M, on the basis of EPA, you would want to use $8M for the cost of a life.