Rational Pricing and Terrorism

Rohit Khare (khare@w3.org)
Thu, 5 Sep 1996 04:51:39 -0400

September 5, 1996 [NYT]

Economic Scene: Tallying Price of Airline Safety


<Picture: T>he loss of 230 lives on TWA 800, most likely to a bomb, shows
once again that the price of airline safety, among other things, is slower
travel and higher ticket prices. It costs passengers and the airlines time
and money for everything from bomb-sniffing German shepherds to the
now-familiar game of "20 questions" at the check-in counter.

Is the price worth paying? This question will never pass the lips of public
officials who value their jobs.

But speaking the unspeakable has never been a problem for Robert Hahn, a
resident fellow at the American Enterprise Institute in Washington and
author of "Risks, Costs, and Lives Saved" (Oxford University Press, 1996).
While many will no doubt reject his conclusion that the extra resources
spent to deter airline terrorism could be better used elsewhere, his
numbers do illustrate how inconsistently Americans weigh the price of risk
in their daily lives.

Forget, at least for the moment, the gantlet of metal detectors, X-ray
units and security guards that have been part of air travel since the rash
of hijackings in the 1970s. Indeed, forget the new technology --
bomb-detecting machines, automated employee identification devices, and so
forth -- proposed for airports since TWA 800 exploded off Long Island.

Hahn looks only at the cost of time, the extra half-hour both the airlines
and the Federal Aviation Administration now ask passengers to set aside for
pre-boarding rituals.

Time spent milling around airports is money for a lot of travelers. Not
everybody puts a high price on the extra time -- a 9-year-old en route to
Orlando to visit Mickey is in a far different position from, say, a harried
salesman with a client waiting in Denver. And a lot of the time can be put
to good use: Witness the vast multiplication of laptop computers and
cellular phones in passenger terminals and airline lounges.

Still, Hahn conservatively puts the number at $20 an hour. Figure $10 for
the lost half-hour times the 500 million passengers who boarded flights in
America last year, and you end up with a total cost of $5 billion.

Hahn figures that since 1982, 548 people (almost half of them on TWA 800)
have died in air crashes in the United States linked to sabotage. That
comes to 37 lives a year. Divide this number into $5 billion, and you end
up with $135 million as the cost for each life saved, provided the new
precautions at airports actually cut sabotage deaths to zero.

Is this a good investment? The very idea of "investing" in lives the way,
say, AT&T invests in telephone switches, is repulsive to most people.

Fact is, though, that both government and business are forced to make such
decisions all the time. New houses would have sprinkler systems if building
codes required them, or home buyers demanded them. But they don't,
presumably because the benefit in terms of fewer fire fatalities is deemed
smaller than the cost in higher housing prices and ugly nozzles sticking
out of the ceiling.

In the case of air safety, Hahn says, failing to calculate costs and
benefits carries a special price. Longer delays at airports will push some
travelers on shorter trips into cars instead, which are 10 to 20 times more
dangerous per mile traveled. Hence, in the process of saving 36 lives on
aircraft, Hahn calculates that at least 36 will be lost on the road.

More generally, Kip Viscusi, an economist at the Harvard Law School, has
estimated that saving a life at a price of more than $50 million is
self-defeating because it drains resources from other life-saving purposes.
While it is impossible to trace cause and effect, $50 million funneled into
antiterrorism (or anything else) that marginally reduces expenditures on
mammograms, street lights and fresh veggies costs a statistical life.

Enormous outlays for antiterrorism may still be defended in terms that
economists and other bean counters will countenance. Arguably, the airport
delays are worth it just because travelers feel safer: purely psychic
benefits do count. It is also possible that the establishment of the
principle that terrorism will not be tolerated is worth far more than the
tangible benefits in safer skies.

But such arguments work both ways. If the point of terrorism is to disrupt
the society and economy, much of the reward is in the excessive response.
It is not far-fetched, after all, to imagine a day when the quality of
American life is seriously sacrificed on the altar of deterrence.

The moral, Hahn argues, is not to give up vigilance, but to understand that
too much of it can be a bad thing.

"We should zealously attempt to contain terrorism," he says, "but we must
be wary of giving up our money or our time before having a reasonable idea
of what we will get in return."