The Crash of Asiana Flight 214 and the Virtues of Government Oversight
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Jul 15, 2013

The Crash of Asiana Flight 214 and the Virtues of Government Oversight

By David Besanko

The crash of Asiana Flight 214 is noteworthy first and foremost for the miracle that so few people were killed. But it also brings to mind just how safe air travel is. Between 2000 and 2009, 181,297 people were killed as drivers or passengers in automobiles. Over the same period, 789 people were killed in plane crashes—less than one-half of one percent of the total number of flyers. Five hundred thirty-one of these lives were lost in 2001, the majority due to 9/11.

Why is air travel so safe, much safer than it was even 25 years ago? In a phrase: government oversight. Regulation has made flying safer in countless ways, underscoring the enormous benefits of strong safety regulations.

An argument could be made that market forces are also critical. ValuJet Flight 592 crashed over the Everglades on May 11, 1996 due to a fire caused by improperly stored chemical oxygen generators. The incident, which killed all 110 people on board, brought into tragically sharp relief the airline’s poor safety record and essentially destroyed a promising start-up airline. In a brutally competitive industry, an airline that runs up a poor safety record is unlikely to survive.

But I would argue that government oversight is what allows market forces to operate effectively. In an earlier era, it was often difficult to discern the cause of an air crash. Was it pilot error or faulty plane maintenance (in which case the airline was at fault), or was it the weather or some other natural cause? Not being able to determine the cause made it more difficult than it is today for consumers to effectively “punish” firms that cut corners on safety.

But since the establishment of the National Transportation Safety Board (NTSB) in 1967, and especially in recent decades, the cause of a crash can be determined with a high degree of certainty. And note, by the way, that if the NTSB didn't exist, it is far from clear whether the private sector's incentives to fund a private version of it would align with the social incentives. This is a case where we need government!

Air safety is also a case where regulation is almost certainly superior to market-based approaches to negative externalities. (The externality in this case is the extra risk imposed by passengers when an airline shirks on safety efforts). Imagine a cap-and-trade system for safety investment: each airline is mandated a certain minimum set of safety standards to which it must comply, but if one particular airline overcomplies it can sell credits to another airline for which compliance would be costly.

In principle, this seems analogous to selling rights to pollute. The difference is that under a cap-and-trade system like the European Union’s Emissions Trading Scheme, shifting a given amount of pollution from one source to another usually has little or no net cost to the public (because many regulated pollutants, such as carbon emissions, are nonlocalized in nature). However, shifting the right to cut back safety compliance from one airline to another could have catastrophic consequences for passengers of the airline that purchased credits to reduce compliance.

In certain environments, air transportation being one of them, decentralized investment in safety compliance is very, very fragile, and the central control provided by traditional top-down regulation is extremely valuable.

Editor’s Note: David Besanko is a professor of management and strategy at the Kellogg School of Management. Photo of Asiana Flight 214 from Wikipedia Commons.

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