Real World Enterprises (RWE) provides a variety of “backroom” business services to other companies. It operates eight different facilities that employ large numbers of workers undertaking clerical tasks. The firm has become aware that a significant number of its workers suffer from hand and wrist injuries associated with repetitive motion on the job. These injuries result in productivity losses, increased health care costs (RWE provides generous health benefits to its employees), and reduced employee morale.
RWE has undertaken a study of the extent of the problem. The study finds that the firm would incur a cost of about $150,000 per facility to create a health and safety program directed at this problem. The study also notes that the problem is much greater at some facilities (because of differing clerical tasks) than at others. The following table estimates the relation between total benefits to RWE and the number of facilities participating in the safety program:
Number of Facilities Total Benefit
in Program to RWE
1 ............... $500,000
2 ............... $975,000
3 ............... $1,375,000
4 ............... $1,600,000
5 ............... $1,700,000
6 ............... $1,800,000
7 ............... $1,850,000
8 .............. $1,875,000
a. At how many facilities (if any) should RWE offer the health and safety program? What is the net gain for the company given this investment in the program?
b. A study by the Occupational Safety and Health Administration (OSHA) finds that health and safety programs like that contemplated by RWE also benefit society beyond RWE and its workers (e.g., the programs also benefit the families of injured workers). In the case of RWE, these additional benefits to society would add about $75,000 in benefit for each facility in the program. What does the OSHA study imply about the optimal number of RW facilities that should receive the health and safety program relative to your answer in part (a)? Explain.
c. One group in OSHA wants to require that a universal health and safety program requirement be implemented for all workplaces (in RWE’s case, all eight facilities would be required to adopt the health and safety program). What would be the social welfare impact of this requirement in RWE’s case?
d. How might OSHA provide an effective and direct incentive system to induce RWE to implement programs in the optimal number of facilities as in part (b)? Explain.