[Joseph_E._Stiglitz,_Carl_E._Walsh]_Economics(Bookos.org) (1)

p, the price of the good(s) being produced, and the interest rate (here, r) are kept
fixed. We focus our attention solely on the wage rate, the price of labor. Given p and
r, we look for the wage at which the demand and supply for labor are equal. This is
a partial equilibrium analysis of the labor market. But in fact all markets are interrelated;
the demand for labor depends on the wage, on the interest rate, and on the
price at which the firm sells its output.
The labor market is only one of the three markets, even in our highly simplified
economy. There is also the market for capital to consider. In Chapter 9, we saw how
Thinking Like an Economist
INDIRECT TRADE-OFFS AND AIR SAFETY FOR CHILDREN
General equilibrium analysis calls attention to the fact that tradeoffs
often exist across markets. The benefits of an action taken
in one market may be offset by related costs that arise in another
market. This same reasoning applies to government policies, as
policymakers work to balance the costs and benefits of expenditure
programs and regulations. Sometimes the costs of a policy
arise through its indirect repercussions. Such indirect trade-offs
helped determine regulations related to air safety for children.
States require small children in cars to ride in specially
designed safety seats. So why shouldn’t small children traveling
by plane be required to ride in safety seats as well? It seems
clear that in at least a few cases, such seats would save a child’s
life in an airplane crash. Nevertheless, after considering the full
potential consequences of requiring child safety seats in planes,
the Federal Aviation Administration (FAA) argued against it.
On the benefit side, the FAA estimated that mandatory
safety seats would save the life of one child in one airline crash
every ten years. But parents would have to pay as much as $185
to buy the safety seats themselves, in addition to paying for a
regular airplane seat for the child. Under current regulations,
children under two years old are allowed to sit in their parents’
laps, avoiding the expense of an airline ticket. With those extra
costs, the FAA estimated that 20 percent of the families who
now fly with small children would either stay home or drive.
The additional driving would lead to 9 additional highway
deaths, 59 serious injuries, and 2,300 minor injuries over the
same ten-year period, according to FAA estimates.
Even those who feel that saving an additional child’s life
has a value that cannot be reduced to a price tag, however
high, must look beyond the market being regulated. Looking
beyond airlines makes it clear that reducing airline deaths by
requiring child safety seats for infants and toddlers is almost
certain to cause even greater total loss of life.
228 ∂ CHAPTER 10 THE EFFICIENCY OF COMPETITIVE MARKETS