Auto Safety Regulation: An Analysis of Market Failure

Although a number of studies have shown seat belts to be highly effective in the prevention of death and injuries, they are used by less than 20% of automobile occupants. This low utilization has led to the present regulation that beginning in 1982 new cars must be equipped with a passive restraint system (i.e., either automatic seat belts or air cushions). This paper examines the potential sources of market failure in this situation (information imperfections and market externalities) and performs a cost-benefit analysis of the mandatory passive restraint regulation. A major finding is very high benefit-cost ratios from the substitution of passive for manual seat belts but much more mixed results in the case of air cushions.