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Consumer Protection

July 25, 2010 

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\noindent
Eric Rasmusen, Department of Business Economics and Public Policy, Kelley School of Business, Indiana University. BU 438, 1309 E. 10th Street, Bloomington, Indiana,
47405-1701. (812) 855-9219. Fax: 812-855-3354. \href{mailto:erasmuse@indiana.edu}{erasmuse@indiana.edu}, \url{http://rasmusen.org}.

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 What I want to cover in this chapter is regulation of consumer goods for safety and value.  The market failure that can justify this regulation is imperfect information. 

Let us start by talking about this problem generally. 

Here are some common fallacies in everyday thinking: framing, etc. 

Simply having bad information is another form of the problem.

How would we illustrate this in a supply-and-demand diagram? 



 Have you ever been wrong about the safety of a
product?

  About the quality of a product?
 
  Would more information have helped?

  Would a safety or quality standard have helped?


Ways to Regulate
\begin{enumerate}
\item
 Require truthfulness in safety or health claims.
\item
  Require disclosure of safety or health risks.
\item
 Offer voluntary certification of health or safety.
\item
  Require a certain safety standard.
\item An overrideable default choice (weak paternalism)
\end{enumerate}


Can you think of situations where each is appropriate?

Automobile design, Airline service, chemical levels in the
workplace, chemical levels affecting people living near a factory,
effectiveness of a drug, safety of a drug, sugar content of cereals, alcohol
level of beer, risk of misuse of a chainsaw, dangers of canoeing, dangers of
hangliding, roller coaster rides, cleanliness of slaughterhouses, peanut
content of cookies, the danger of gall bladder surgery…

A big problem is that the government itself is prone to Poor Information and Irrationality. 

 Product liability law is one way to address the problem of safety. 

False Positives and False Negatives is a big problem with government regulation. I will not use drugs here as the example--- instead, use a new toy.  Illustrate the Fire Alarms theory of bureaucracy. 

In a sidebar, talk about the idea of dealing with bureaucrats by getting their names and threatening their careers.  

 This justifies a lot of morals regulation. The idea is that people who really knew what they were doing would not buy things like pornography or heroin. Here talk about JS Mill's idea of superior pleasures. 


---------------------------------------

 Should the government ban bottled water, because it is silly for people to pay so much for it? 

------------------------------
 

 \begin{figure}
 \includegraphics[width=6in]{temp.pdf}
\caption{\bf Temp diagram holder }\label{davies77.jpg}
\end{figure}

 
 -------------------------------------------------
 
Case Study: Brockovich, Benzene, and
Manipulation

Erin Brockovich is a lawyer who was the title character of a movie
about how she took on a utility company that was poisoning people in
a small California desert town.
Beverly Hills High School has an oil well on its property. Erin
Brockovich said she found 300 cases of people with cancer caused
by it.

"I was just sitting in the bleachers," she told parents gathered for a
meeting March 2003 at the Beverly Hills Hotel, "and we got benzene
readings that were at very alarming levels-- at least five times
higher than on the 405,"-- a freeway. The result of this
contamination, she continued, was Hodgkin’s disease at sixteen times
the expected levels among alumni.

She told People magazine about it too.

 

Regulators shut down the oil wells for some months, and then cited
Venoco for two potential violations -- an antipollution unit had
insufficient filters and the wells had, on occasion, vented natural
gas, a process for which the company insists it had permission.
Neither potential violation significantly affected benzene levels and
both were settled in October
 
 
"Beverly Hills is not all Botox, faux-Spanish mansions and imported
sports cars," wrote the august Economist magazine. "It also has cancer
clusters, and these have become Erin Brockovich’s latest crusade."
The New York Times’s coverage was typical, offering dueling quotes
while leaning toward Brockovich-Ellis’s position.

 
Ms. Zager, a reporter at a local paper, was nearly alone in reporting
that the Brockovich benzene readings were bogus, that the law firm
lacked evidence of a cancer cluster and that they had found only 94
cases of cancer, not 300.

Brockovich-Ellis and Masry refused to release their data until the
city subpoenaed them and a judge ordered them to comply -- a fact
only Zager noted in her stories.

When the data sets were finally handed over, nearly all the readings
were normal. The highest benzene reading was still below state
regulations and was contradicted by another sample Brockovich-Ellis
took at the same time that showed no measurable benzene.

 

She reported, too, that a local TV producer who had hyped the story
had received money during her run for a city council seat from the
head of Ms. Brockovich's law firm.

Toxicologists, epidemiologists, and oil regulators all dismissed
Brockovich-Ellis’s and Masry’s assertions as quackery: the wells
weren’t leaking, the air was relatively clean, and rates of Hodgkin’s
disease around the school were normal.
Despite reporters’ "balanced" coverage, no independent scientist
backed up the allegations as credible.

In any case, several studies have shown no link between oil
wells and Hodgkin’s. Los Angeles has thousands of wells and none
has been linked to any cancer.
 
Is there any evidence that benzene at the
levels found at Beverlcauses cancer?
"No," says Thomas Mack, chief of the
epidemiology division at the University of
Southern California’s medical school.
"You’re just as likely to get cancer from your
car stereo."
 
Drain Opener Labels
 
PERCEIVED
 
VHV do not explain the vertical bars in the diagram. Range of responses,
perhaps.
 

-----------------------


How should the government should
respond, if at all, to public
misperceptions?

• Suppose, for example, that the public
greatly overestimates the risks associated 
with hazardous waste sites.

• Should the government respond to these
fears because, presumably, in a
democratic society the government action
should reflect the interest of the citizenry?

• What will happen?

---------------------------------------------
 
What explains safety regulations?

TV and Film Industry Wins Waiver on Truck-Safety Rules (WSJ)
A little-noticed provision in the \$820 billion government spending bill
that cleared Congress last week prohibits federal highway-safety
regulators from enforcing new truck-safety regulations on
commercial drivers who work in the film and television industry.


The so-called hours-of-service regulations, ... are intended to reduce
highway accidents involving tired truckers by extending the length
of time truck drivers must rest between shifts to 10 hours, from
eight.

The Federal Motor Carrier Safety Administration estimates the rules will
save 75 lives a year, prevent 1,326 fatigue-related injuries, and
prevent 6,900 property damage- only crashes, resulting in
annual savings of some \$628 million.

Under a 100-word provision buried deep inside the
bill, the agency is effectively barred from enforcing the
regulations on
"drivers engaged in the transportation of property or
passengers to or from a motion picture or television
production site located within a 100-air mile radius of the
work reporting location of such drivers.“
 
Critics said the provision was crafted in secrecy and
would encourage other industries to seek similar
exemptions.

A spokesman for Sen. Dianne Feinstein (D., Calif.)
said the senator sponsored the provision and that the TV
and film industry's drivers typically drive less than 100
miles a day, often resting at the production sites. "We do
not feel this would compromise safety," the spokesman
said.


--------------------------------------------------


DONNA CHAN IS 23 years old and has been
out of college since May 2002, when she
graduated from Wagner College on New York's
Staten Island. So should anyone care how she
did way back in high school on her SATs?
Since Ms. Chan started looking for an entrylevel
job in financial services more than a year
ago, she has repeatedly stumbled over a
common requirement for many of these
positions: a combined SAT score of at least
1300 out of a maximum 1600.

• "Career Journal: More Employers Ask Job Seekers For SAT Scores" (28 October
2003, WSJ)

Consider this recent ad on HotJobs.com for an
entry-level, investment-banking position:
"Minimum expectations include an overall score of
1350 on the SATs. . . . You will be required to
provide official scores and transcripts, so please do
not respond if you do not meet the aforementioned
requirements.“
 


Alan Sage, a vice president at Configuresoft Inc., a
Woodland Park, Colo., systems-management
software company, says he routinely asks
applicants to submit their SAT scores when they
apply for sales jobs.

• While Mr. Sage says he has always asked to see
SAT scores, he admits that he was far more flexible
when Configuresoft was first launched in the boom days
of 1999. With his sales team experiencing lots of
turnover, he says, he had to "beg marginal people" to
come work for the company.

• Mr. Sage says he also places the SAT requirement
in ads to see whether applicants are paying attention to
details.

• When he placed an ad for an account-manager
position on an online job board earlier this month, he
received hundreds of resumes. But fewer than 10% of
respondents bothered to include their scores.


 ----------------------------------------------------------

February 16, 2009 from the Bloomington Herald Times:
 

\fbox{

 {\bf Restaurant Inspections}

Following are results of recent inspections of food establishments by the Monroe County Health Department. Critical violations are reported. They are most likely to affect public health, such as grossly soiled surfaces that come into contact with food, foods kept at improper temperatures, chemicals stored near food and employees handling food without wearing gloves. 

 }%end of fbox
 
\noindent
{\bf CRITICAL VIOLATIONS}
\begin{itemize}

\item
  Jiffy Treet East, 223 E. Third St., Jan. 14, foods held at improper temperature, corrected during inspection.

\item Wendy’s, 221 W. Second St., Jan. 8, foods held at improper temperature, corrected during inspection.

\item Kentucky Fried Chicken, 2901 E. Third St., Jan. 20, chemical sanitizer concentration low, corrected during inspection.

\item Moose Lodge, 1580 W. Bloomfield Road, Jan. 23, soda guns at ballroom bar needed cleaning, corrected during inspection.

\item Office Lounge, 3900 E. Third St., Jan. 21, dirty dishes in hand sink which should not be used for other purposes, corrected during inspection.

\item Fairfax Market, 8666 Fairfax Road, Jan. 30, food items needed dates when they were repackaged.

\item Circle K/Macs, 2510 S. Leonard Springs Road, January, foods held at improper temperature.

\item 10th Street Market Inc., 1809 E. 10th St., Jan. 11, various types of raw frozen meats all in packages together causing cross contamination problems. Different meat items needed to be separated.

\item  Bajio Mexican Grill, 3304 W. Third St., Jan. 7, dish washing at three-compartment sink a concern about cleaning and sanitizing food-contact surfaces.

\item  Papa John’s Pizza, 5221 W. Ind. 46, Jan. 12, chemical spray bottle stored on shelf next to food-contact items, corrected during inspection.

\end{itemize}

\noindent
{\bf NO VIOLATIONS}
\begin{itemize}
\item Jimmy John’s, 1827 E. 10th St., Jan. 21.

\item Village Pantry, 1831 E. 10th St., Jan. 21.

\item European Cooking School, 2128 Industrial Park, Jan. 23.

\item Dollar General, 3618 W. Third St., Jan. 14.

\item Limestone Grill, 2920 Covenanter Drive, Jan. 14.

\item CVS Pharmacy, 510 College Mall Road, Jan. 16. 

\end{itemize}

-------------------------------------------------------
 

TORT SUITS

In a tort lawsuit, a plaintiff sues,
claiming that a defendant is liable for
injuring him (has “committed a tort’’).


“Liable” and “not liable” are the
equivalent of “guilty” and “not guilty” in a
criminal trial. But tort suits don’t usually
have the government on one side (though
the government, like a private person,
can sue and be sued).


The Liability Standard

Negligence Standard: The plaintiff must
show that the defendant was careless.


Strict Liability Standard: The plaintiff
must show that the defendant caused the
injury, but does not have to show that he
was careless.
 
What Is the Purpose of the Tort
System?

(1) To punish negligence.
 
or
(2) To insure people, spreading risk.


Three Systems of Injury Compensation

Cause-based. Workmen’s compensation.

Loss-based. Health insurance.
 
Fault-based. Tort liability.

Different Methods
 
Should Insurance and Tort Liability

Compensate for Pain and Suffering?

Would you buy insurance for non-economic
damages?


Example 1: paying extra for insurance that pays
you extra money if you suffer a facial injury that
makes you ugly.


Example 2: life insurance on the life of a child.


The Patient's Right Not to Sue
How about a right to opt out?


Miller: “I DON’T WANT THE ABILITY to sue my
health insurance company. Lawyers are
expensive, so if my insurance providers know
that I might sue them, they’ll charge me more.


Other people in contrast might want to pay for
people, contrast, the ability to sue. A true patients’ bill of rights
would give all of us the choice.

…if I hate broccoli, forcing me to buy it
increases my obligations, not my rights.”


Congress could allow college graduates making over
$60,000 a year to opt out; or it could permit insurance
companies to sell such opt-out policies to up to 10
percent of their customers.


How would people with the freedom to opt out behave?

Would insurers withhold vital treatment from those
unable to file lawsuits? Would they practice wasteful
defensive medicine on those who could?

How Does the Tort System
Change Incentives?

What changes are good?

What changes are bad?
 
Ford Pinto Gas Tank
 


FLU VVAaCcCcIiNnEesS

Why is 100 percent of US flu vaccine now made by two companies in
Europe?

In 1967 there were 26 companies making vaccines in the United
States. Today there are only four that make any type of vaccine and
none making flu vaccine. For Lyme disease, there is no commercial
vaccine, even though one has been approved by the Food and Drug
Administration.



Strict Liability replaced Negligence in the 1960’s, for product
liability.

Couldn’t prices just rise to adjust? No—elastic demand. Plus
after 1993 Congress made the government a monopsony.
Of the 12 vaccines for childhood diseases, seven are made by
only one company and only one is made by more than two.
In 1976, the federal government decided to vaccinate the whole
country against the new "swine flu."


To the astonishment of Congress, the insurance companies
refused to participate.

The Congressional Budget Office predicted that with 45 million
Americans inoculated, there would be 4,500 injury claims and 90
damage awards, totaling $2 million. Congress decided to provide the
insurance.



A total of 4,169 damage claims were filed. However, not 90 but
more than 700 suits were successful and the total bill to Congress
came to over $100 million, 50 times what the CBO had predicted.
The insurance companies knew their business well.
How many claims would have won against private corporations?


Whooping Cough

In 1974, a British researcher published a paper claiming that
the vaccine for pertussis (whooping cough) had caused seizures in
36 children, leading to 22 cases of epilepsy or mental retardation.
Subsequent studies proved the claim to be false, but in the
meantime Japan canceled inoculations, resulting in 113 preventable
whooping cough deaths


In the United States, 800 pertussis vaccine lawsuits asking $21
million in damages were filed over the next decade. The cost of a
vaccination went from 21 cents to $11.

Every American drug company dropped pertussis vaccine
except Lederle Laboratories. In 1980, Lederle lost a liability suit for
the paralysis of a three-month-old infant--even though there was
almost no evidence implicating the vaccine. Lederle's damages
were $1.1 million, more than half its gross revenues from sale of the
vaccine for that entire year.



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{\bf  Questions You Should Be Able to Answer}

    

 


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