Time for a change of gear from recent posts. Every now and then it is interesting to see where economics has applications in the real world in areas that one wouldn't normally expect to see any relevance. I suppose you could call this a bit of a "Freakanomics" diversion [that was in fact the book I always intended to write - but I don't think Freakanomics will be bettered in this genre].
So, I was watching a car show on television the other day, not Top Gear (which is brilliant). In it there was a segment looking at car impact safety and how it has advanced over the last 10-15 years. The set up was that they crashed a 1990 something Volvo 940 into a 2007 Renault Modus. Now, Volvo have always had the reputation for being safe cars and the 940 is a significantly large car than a Modus - and crucially has a much longer front bonnet (better for providing an energy absorbing crush zone than the stub-nosed Modus).
What happened when they threw the cars at one another head on at 40 mph was a near total destruction of the Volvo, with very serious incursion of the impact into the passenger cell of the car. By comparison, the Modus showed virtually no sign of impact from within the cabin. A driver in the Volvo would almost certianly have suffered extremely serious injuries, while one in the smaller Modus may have escaped with light grazing only.
Interesting, huh? But where is the economics?
The economics is here - and it is in the form of an application of both externalities and game theory. To take you through it you need to go back a few decades in car design, to a time when big, strong and rigid was the order of the day.
In the 1960s a safe car was a big and strong car, able to withstand impact and keep the passengers inside within a protected shell.
By the 1970s engineers were working with new materials and technology and thinking shifted to provide for a rigid passenger cell, with softer, energy absorbing crumple zones at the front and rear. That technology existed into the 1990s - and is evident in the Volvo 940 here.
Now we have moved on further, with new technology entering into the industry, designed specifically to make smaller cars (now more popular) safe in high speed impact. That is the Modus, which has a very small crumple zone in the front, and extremely strong front firewall and just as crucially a small and light low mounted front engine.
What the display showed was how effective all those elements worked together on the Modus, but one thing caught my attention. As good as the Modus saftey features were, a large amount of the energy in the crash was absorbed by the Volvo, which all but disintegrated. In effect, the Modus used the Volvo as an additional crumple zone. Had the same test been run with a big heavy and rigid 1960s design car, I doubt the Modus would have fared nearly as well. Not only would there have been less energy absorbed between the two cars, the opposition would have been significantly heavier and we know that energy is equal to mass squared.
And there is the economics. You can design a really safe small car like the Modus, if you know that everyone else will be driving around with a big soft crumple zone on the front of theirs. You can get away with carrying less energy absorption around yourself. That is the externality - you can be safe by demolishing somebody else. Of course, that works only until other drivers recognise that change their cars to something that provides them with more safety in the event of a crash with a Modus - the alternative strategy is to drive a Hummer with a "roo bar" fitted. A Modus wouldn't survive so well as the Hummer would likely use it as a stopping aid.
And there lies the game theory. The safety of your own car in a crash is a function of what someone else drives. You modify your decision based on what the best payoff will be for you given the likely option chosen by others. The next time you run into that Volvo 940 driver in your Modus, it is more likely they will have switched to the aforementioned Hummer.