A manufacturer of wood chippers estimates that the probability of a fatal accident caused by the design of its product is 1/40,000 and the value of a life lost is $2 million

The manufacturer can change the design to eliminate that chance for $60 per wood chipper and is prepared to incorporate all cost-justified precautions. Will the manufacturer change the design? What would the benevolent social planner think about the manufacturer's decision if the true probability of a fatal accident is actually 1/30,000?

The manufacturer's estimated death cost per wood chipper is: $2,000,000 × (1/40,000 ) = $50.
The cost of changing the design is $60 per wood chipper.
Since the estimated death cost is less than the cost of changing the design, the manufacturer will not change the design.

The true death cost per wood chipper is: $2,000,000 × (1/30,000 ) = $66.67.
The cost of changing the design is $60 per wood chipper.
Since the true death cost is greater than the cost of changing the design, the benevolent social planner would advise the manufacturer to change the design.