California Space Heaters 11/19/2018

California Space Heaters -- Background Who buys kerosene heaters? Consumers with low income Consumers with electric heat What hazards are associated with kerosene heaters? Fire Temperature Flare Up (Overheating) Ignition Spark Refueling (Tank Overflow) Emissions Oxygen Depletion Historical Data (Older Technology) CPSC: In 1982, kerosene heaters were associated with 3300 fires, 130 Deaths, 370 Injuries, $35.2 million in property loss

What can producer do to reduce hazards? Fire Install Thermostat ($7.50) Install Temperature Shutoff ($22.00) Install Tank Level Gauge (3.00 Install Automatic Cutoff ($8.00) Reduce Burning Temperature ($40.00)* Install Siphon Filling System ($12.00) Install Spark Emission System ($19.50) Install Large Tank ($12.00) Install Removable Tank ($6.00) Emissions Install Wick Stop ($6.50) Install Wick Adjustment ($32.00) Oxygen Depletion None

What can consumers do to reduce hazards? Place Heater Away from Combustibles Use Only Low Sulfur Kerosene Position Wick Correctly Refill Outside Use Kerosene Additive Cleaning & Wick Replacement Vent Room

Costs & Benefits Consumer Savings Production Cost Demand Oil Heat -- $470 per year Electric Heat -- $685 per year Production Cost Basic model = $44 (Retail $88) Deluxe model = $189 (Retail $378) Demand Basic Model = 2 million Deluxe Model = Negligible Liability Costs Basic Model -- $55 Deluxe Model -- $10

Risk Accident Risk (Overall) Accident Risk (Features) Manufacturing Defect – 1/1 million Misuse (Basic Model) -- 5/100,000 (50/1 million) Misuse (Deluxe Model) -- 4/1 million Accident Risk (Features) Spark ignition reduce fatality risk by 50% Wick adjustment reduce fatality risk by 2.5%

Key Questions Is the heater a beneficial product that should be produced? How should the firm decide what features to include? What role can warnings & instructions play? Should the company offer multiple products and let customers chose? Millions of these heaters have been sold, variation in models & features Consumer Reports prices range from $170-$290 – All were judged to be inherently dangerous 1985 CR states that 15-16 million were in use Government inspection & maintenane As of 1994, govermment required that Diesel fuel be colored. This could be done for Kerosene. Other issues – imported products Exports – Turkey wants low cost model only.

Implied prices of a life Safety feature Baseline deaths Pct reduction Lives saved Unit cost add-on Total cost of add-on Implied price of a life Electric wick adjustment 5 in 100,000 2.5 .125 $32 $3.2m $25.6m Electric spark ignition 50 $19.50 $1.95m $780,000

Other Issues -- Export A government-owned company in Turkey has asked CSH for a license to produce its kerosene heaters Background Basic model only with minimal safety features Low-income users who face high energy costs Kerosene is widely used in Turkey for a variety of purposes High sulfur kerosene more commonly available that low sulfur Many homes in the mountainous regions are poorly ventilated Lawsuits not likely either in the U.S. or Turkey for accidents The heaters would not be regulated in Turkey Should California Space Heaters license the heater to Turkey? Who should decide on the safety features? Should any safety features be installed? How should the product be priced? Should product be licensed? (What are alternatives – freezing? Wood fires? Note that Turkey has wide use of kerosene.) Who is best placed to evaluate costs & benefits? (Turkish firm -- CSH has duty to provide information.) Should CSH insist on safety features? (If Turkish company fully understands hazards, then insisting would amount to paternalism.) Are markets really separate (Ford Firestone & Venezuela) Options – monitor accidents?