Question

Suppose a middle-class consumer chooses to buy a new small car instead of a new big car, even though the annual risk of fatality in the small car is larger (3 in 10,000 instead of 2 in 10,000). Suppose the annual car payments for the small car are $400 less than the annual payments for the big car. On the basis of revealed preference, can we safely conclude that the consumer is willing to pay no more than $400 for a 1 in 10,000 reduction in the risk of fatality? Explain your answer.

Answer 1

You see, while purchasing a new car and evaluating different options available, there are many parameters that a consumer considers upon. These parameters include many, of course including safety, however safety not being the only criterion. What these different parameters may be, for example? Let us see:

• Affordability
• Availability of parking space
• Annual running costs including insurance, taxes and maintenance
• Safety
• Cabin space, layout, features and frills
• The awe factor on exterior design
• Exclusivity factor
• Resale value, trade in value
• Fuel economy
• Proximity of car company's authorized garage
• Frequency of car services needed
• Availability of spare parts and repair engineers
• Brand-loyalty
• Durability, robustness of the built
• more....

So we see that there are actually too many parameters besides safety. It depends from person to person as to which parameter(s) he is most considerate about.

In the given equation, let us say even if we assume that safety is the most gravitating parameter for the said middle class consumer, the difference of $400 in annual payment cannot be said to be attributable to the safety parameter alone. We cannot safely conclude that the consumer is willing to pay no more than $400 for a 1 in 10,000 reduction in the risk of fatality. There are many other factors too.