Some further thoughts on the VW scandale

VW is (obviously) still making the news. There are rougly 8m cars with the defeat device in Europe, worldwide an estimated 11m. So there’ll be rather large costs that VW will face in the near future. Those costs will compromise the liability law suit costs from not adhering to the regulation, the fraud costs, the costs of taking the defeat devices out of the 11m cars, the reduction in demand especially in the US where VW’s cars are not going to be used to such an extent anymore, the reputational loss, the loss of the competitive edge, and the costs of needing to restructure its production lines.

In general, everyone is simply angry with the fact that a company like VW is toying with them, with the trade-mark Made in Germany, with the regulations, and that they could get away with it for nearly a decade. BUT, this is also not the first incidence of this kind, other car manufacturers have toyed with people’s lifes to a similar extend, see the discussion HERE. For example, Ford and General Motors have done even worse.

We know that all companies are relying on Cost-Benefit Analysis in their decisions, and too often the company’s private benefits minus expected liability costs exceed the costs of adhering to safety standards. That, obviously, is the reason for governmental regulations in nearly all markets as well as a huge literature on liability laws. And these regulations should not be cheap-talked. For example, the Clean Air Act in the US is estimated to have led to an additional two years of life expectancy in the US alone.

There are unfortunately some who question the importance of this scandale. Tyler Cowen, a well-known economist, for example, believes that corporate fraud is not the biggest problem. He writes that the World Health Organization is estimating that roughly 7m people die each year due to air pollution, so on that scale VW’s fraud is more a rounding error than anything else. John Whitehead from env-econ.net takes him on and trashes this argument.

The real problem is that everyone dies?

There are two messages here. The first is that the VW’s fraud is not a big deal for two reasons. First, after putting the numbers of deaths in the appropriate context, they are just a rounding error. I disagree with this approach because there is nothing in economics, that I’m aware of, to suggest that the proportion of deaths matters whatsoever.

The second reason this isn’t a big deal is because we all cause air pollution every day, am I right or what? Through our own inability to stop killing people by our daily driving and cooking, we are just as guilty as VW! I disagree with this argument because air quality regulations are designed to reduce deaths when the benefits of doing so are less than the costs.

As a bonus, energietransition.de discusses inhowfar the VW scandal may help induce a shift towards more electrical vehicles on the market. And it is argued that the outlook is good:

The VW scandal is a window of opportunity to embarrass the German government into real support for progress in the transport sector – and German car makers into true cleantech innovation. Until recently, Merkel took strict EU car regulations to be a threat. The lesson now is clear: save German car makers by making them leaders in clean technology!

Finally, there is always the question of why we so desperately continue to rely on cars at all. Alexandros Nikitas discusses some options with which we could wean ourselves off them, while Jillian Anable argues that not using the car for even just a day may already help in breaking our habit of relying on them so extensively.

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