Essay on Costs and Social Efficiency

Submitted By PhungV1
Words: 1562
Pages: 7

California Space Heaters, Inc.

Introduction
California Space Heaters, Inc. (CSH) has developed a new line of heaters and is preparing to sell them in the market. The new line of kerosene burning heater can be used to economically warm a home, saving the buyer between $470 to $685 when compared to fuel oil or electric heating standard. However, CSH must address the primary issue of safety and potential hazards before going to market. CSH should consider the social efficiency of adding safety features to the low end heater model and what price point the market is willing to bear to prevent injury. Also, CSH should decide how to prepare for future federal safety standards when making current safety decisions. Finally, we provide recommendations for CSH to limit liability by adding the most impactful safety features and recommend sharing the burden of social efficiency with the consumer.
Issue
CSH has determined the market size of their least expensive heater model: “at a price of $88 sales could reach 2 million units per year” (Baron, 2013: 408). Since the targeted consumer based is low income, demand is price elastic - as price increases, demand would drop disproportionally more. If CSH chose to add safety features to reduce potential injury, it would also have to incur higher manufacturing cost and increase price accordingly, causing a reduction in market demand. Additionally, CSH consulted a lawyer to understand their liability and insurance cost, which could be as high as $55 dollars for the low end model. At $88 dollars with manufacturing cost of $44 and factoring the insurance and liability cost, the overall social cost is ($11) per unit sold. CSH would incur most of these costs through product liability lawsuits. Producing and selling the low end heater in the current scheme is economically inadvisable and socially inefficient. CSH must include safety features to lower the liability cost.
Fire Hazard
The high liability and insurance cost is due to the vast number of potential hazards associated with the kerosene heater usage, some with older technology has already been banned in several states and municipalities (Baron, 2013: 408). Death from fire hazard is estimated to be the greatest – 1/1million from manufacturing defect and 5/100,000 from consumer misuse. Baron states “social efficiency requires balancing the cost of injuries and the cost of care” (2013: 393). Based on the model of social efficiency, CSH should add safety features to avoid accidental deaths when it is not too costly to avoid it. Courts may deem CSH liability of negligence when lawsuits arise if the accident is considered foreseeable and avoidable and no effort was made to prevent it.
Fire hazards caused by the consumer for misuse of the heater include: ignition fire (fire caused to due manually igniting the heater wick), high temperature/overheating (greater risk of fire at higher temperatures), tank related hazards (overflow and spillage), and tip-over hazards (accidental tipping the heater over during usage). Adding an electric spark ignition is the most reasonable since it is estimated to reduce fire fatality by 50%. Assuming a direct correlation between fatality estimates and insurance cost, the $19.50 additional cost of the electric ignition would reduce liability cost by $22.50, increasing social efficiency. In addition, CSH could offset the decrease in demand due to the higher price by now being able to market the electric kerosene heater to more states that only allow the new-technology heaters.
Two additional safety features we recommend to limit future product liability are the thermostat ($7.50) and the removable tank ($6.00). Although, there is limited data on how successfully these safety features reduce the likelihood of injury, they can reduce CSH liability through other means. Since the heater is positioned on the ground, the chances of injury to small children are greater; the thermostat reduce the instances of…