OSHA is a U.S. federal agency which relies almost entirely on mandates to influence firm behavior. The bottom line for the firms is that they end up employing more resources for the purpose of worker safety than they would voluntarily choose. Now lest you think otherwise, we are not members of the PRO-INJURY AND MAIMING SOCIETY. We don't get a special kind of joy every time we hear of an industrial accident. However, consider the following cost estimates of various OSHA worker safety mandates:

Source: John F. Morrall III, "A Review of the Record," Regulation, 1986, p. 30.

Columns (1) and (2) report the specific area in which OSHA intervened and the year the mandate was passed. Columns (3) and (4) report the number of lives estimated to be saved by the regulation and the estimated cost per life saved. Thus, OSHA's 1986 asbestos standards are estimated to have saved 74.7 lives per year, at an annual cost of approximately $6.7 billion (= 74.7 times $89.3 million).

We're not saying that saving 74.7 lives is bad. We think it's great. It's just that $6.7 billion could have produced an awful lot of happiness elsewhere in the economy. For example, just think how many lives that $6.7 billion could have saved if these resources had been transferred to the health industry instead of spent on asbestos removal. $6.7 billion could buy an awful lot of open heart surgeries, not to mention high blood pressure pills, mammogram examinations, drug research, and testing for an AIDS cure. It could also pay for an awful lot of additional police to patrol the streets in high crime neighborhoods.¹

Let us show how our simple framework can be used to analyze OSHA mandates. Consider the example we discussed in the previous chapter. Suppose OSHA issued an administrative decree requiring the XYZ Corporation to utilize a safer, but more expensive, stamping machine. Suppose each of the 5 workers who had to use this machine valued the additional safety at $40 per week times 52 weeks per year (equals $2,080 a year per worker, or $10,400 a year for the five workers). Thus, XYZ Corp. could save $10,400 a year in labor costs by employing the safer machine. However, the yearly rental cost of the safer machine is $20,000. Under these circumstances the firm would not have employed this machine before the OSHA mandate.

Now we're going to do something really weird. Recall from our previous discussion of peanut quotas that firms who violated government restrictions were subject to a PENALTY. We used this concept to show how a firm could be induced to not produce something that is otherwise profitable for them. We now introduce the concept of the PENALTY AVOIDANCE BENEFIT (PAB) to show how a firm can be induced to produce something (safety) that is unprofitable for them.

If the firm violates the OSHA mandate, something bad happens. What exactly will happen? Surprisingly, this time we really do know the answer to that question: OSHA imposes an administrative fine (penalty). In this instance, suppose that the firm would incur a $15,000 fine if they did not replace the old stamping machine with the newer, OSHA-mandated model. By switching to the newer machine, the XYZ Corporation avoids having to pay this tax penalty. The opportunity to avoid this penalty provides the financial incentive for the firm to obey the OSHA mandate. As a result, we can treat this penalty avoidance benefit (PAB) the same as a subsidy. (Recall that we previously treated the penalty from violating a quota the same as a tax).

Why is a PAB like a subsidy? Suppose your boss tells you he'll pay you $50 to show up for work next Saturday. As you lie in bed half asleep on Saturday morning, you consider that there is a $50 benefit for getting out of bed and going to work. Compare that to the case where your boss tells you he's going to reduce your bonus by $50 if you don't show up for work on Saturday. The benefit of getting out of bed and going to work is still $50. In the first case, your boss "subsidizes" your pay to get you to work. In the second, case he threatens you with a penalty if you don't go to work. In each case, working gives you $50 more in your pocket than not working.

It's the same thing for the XYZ Corporation. If it follows OSHA's mandate to employ the new machine, it ends up $15,000 more in its "pockets." We can now represent the XYZ Corporation's decision to buy the new machine before and after the OSHA mandate as follows.

Prior to OSHA's mandate, the XYZ Corporation would have never chosen to make the workplace safer by using the new stamping machine. And that was the right thing for them to do. The gain that the workers would have experienced from having the safer machine was only $10,400. But it would have come at the expense of $20,000 in lost happiness elsewhere in the economy. The resources that would have been used to construct the new machine would have had to be taken away from other consumers. Those other consumers would have gotten greater pleasure from those resources than the workers at the XYZ Corporation. Thus, by not employing the new stamping machine, the XYZ Corporation allows these resources to be released to go to a higher valued use.

The OSHA mandate changes all this. It causes a reallocation of resources away from other consumers to the workers of the firm. And that change in the allocation of resources lowers society's happiness by $9,600 (the difference between the gain of $10,400 in happiness by the workers of the XYZ Corporation, and the loss of $20,000 in happiness by other consumers). Of course there are other firms besides the XYZ Corporation who are impacted by OSHA's mandates. As a result, we will never know the total amount of the social loss created by these mandates. But we do know that too many resources will be allocated to the production of safer workplaces. This is the great value of our SIMPLE FRAMEWORK. It allows us both (i) to demonstrate that society's happiness will be lowered by these mandates, and (ii) to illustrate just what it is that causes this loss. All in the context of a simple table, and we need not be experts in the industry being regulated.