External Costs

Problem-1 (50 pts)

In the US the process for getting and keeping a driver’s license is as follows:

Study the law àGet learner’s permit àPractice driving àDriver’s test, get license àDrive àAccident or get a ticket àResults (e.g., temporary loss of license) àdrive àaccident àdrive àget old and stop driving. In some places there is a test for proficiency at an older age such as 70; in others there is none.

Analyze the above system from the perspective of quality costs. How does this system maintain driver quality (meaning drivers who don’t get into accidents)? What are the prevention and appraisal costs that this system incurs? How do they compare (in magnitude) with internal and external costs? If you were redesigning the system to improve driver quality without raising total system costs, what would you change?

(Note that in this as in many other services, the customers (the drivers) are also part of the production process. So you can call “internal failure costs” the costs borne by the government plus the bad driver. External failure costs are costs that affect other drivers.)

Problem-2 (50 points)

What are the costs of quality that are incurred by a restaurant that serves food that is eaten raw: salads (for example)? Discuss these costs under the four headings (prevention, appraisal, internal failure, and external failure). A full discussion has to include this restaurant’s supply chain – all the entities that “touch” the food on its way to the restaurant.

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