The FAA understands and applies marginal analysis

So often, I'm disappointed at how economically illiterate governments are, both among policy officials and elected representatives. So, I was a little surprised and happy to read this post by Eli Dourado on personal aviation. It was this bit in particular that caught my attention:

It’s possible by some lights that the market will not produce the optimal amount of safety at all relevant margins, and so regulation persists. Yet everyone should recognize that there is such a thing as overregulation.

FAA does recognize this. The graphic below comes from a document in which they explain the safety continuum doctrine. “If certifcation [sic] requirements and oversight are overly stringent,” they write, “safety can be jeopardized because the burden of certification will prevent the adoption of safety enhancing technologies.” It’s hard to get more clear than that.

Here's the graphic that Dourado refers to:

Students from my ECONS102 class should immediately recognise this as a variant of the classic marginal analysis graph:

Can the FAA (Federal Aviation Administration) regulate personal aviation too heavily? Yes, they can. They can also regulate personal aviation too loosely. But there is a 'Goldilocks zone' where the level of safety regulation is just right. Consider the graph above, with Q representing the level of safety of personal aviation. Marginal benefit (MB) is the additional benefit of an additional safety measure (more regulation). The marginal benefit of safety regulation is downward sloping. The first and most obvious safety regulations provide the greatest marginal benefits, but after FAA has enacted the obvious regulations, additional safety regulations provide much less additional benefit, as personal aviation will already be quite safe. Marginal cost (MC) is the additional cost of a safety regulation. The marginal cost of safety regulation is upward sloping - the more regulation is added, the higher the opportunity costs of additional regulation. Think about the labour involved. The more workers are diverted to regulating safety, the more society is giving up in other production from those workers. Or, to attract more workers to s, we safety regulation, we would have to offer higher wages. Either way, the marginal cost of safety regulation increases as the FAA increases safety regulation. The 'optimal quantity' of safety regulation occurs at the level of safety where MB meets MC, at Q* in the diagram. At Q1 level of safety, we would be better off with more safety, as the marginal benefit of additional safety is greater than the marginal cost of additional safety. At Q2 level of safety, we would be better off with less safety, as the marginal cost of the last unit of additional safety is greater than the marginal benefit that additional safety provides.

The FAA's diagram works similarly. At low levels of safety effort, there is too little rigour. The marginal benefit of additional safety effort is greater than the marginal cost. At high levels of safety effort, there is too little safety innovation. The marginal cost of the additional safety effort is greater than the marginal benefit.

It is good to see that there is at least one government agency that is able to apply some basic marginal analysis to their decision-making.

[HT: Marginal Revolution, back in October]