Who Are the Victims of the Volkswagen Scandal? Not Their Customers

Volkswagen did a very bad thing: it installed software in hundreds of thousands of cars sold in the United States designed to defeat pollution tests, and then obfuscated when confronted with the evidence.

Last Thursday a U.S. federal court said that the company would either have to fix or buy back some 500,000 cars. The judge also indicated that Volkswagen would have to make a substantial payment to the car owners, regardless of how the problem is finally resolved, to make them whole.

I am all for applying a severe punishment to the company–fraudulently manipulating its equipment to evade a test result is an outrageous act that the government must punish to ensure companies don’t feel emboldened to emulate them. However, the judge lost me when he asserted that the recipients of this essentially tortious payment should be the injured car owners. From my perspective, I’m not that sure that they are victims here.

The drivers undoubtedly saw the resale value of their cars fall owing to the scandal, but that should be something that the car buybacks can account for without too much trouble. However, the higher emissions from the cars didn’t hurt the owners–it damaged the environment, which means it affected all of us, regardless of whether we own a Volkswagen.

The emissions cheating didn’t hurt car performance either–boosting the cars’ performance is why they did this to begin with. In fact, because of the defeat devices the Volkswagen owners got an automobile that performed better than had they bought a comparable vehicle from another company, one that hewed to the emissions standards. They actually benefited from the cheating–at the expense of degrading the environment that we all live in, both VW owners and the rest of us.

Compensating Volkswagen owners illustrates a fundamental chasm between lawyers and economists when it comes to punishing bad behavior. Lawyers tend to argue that tort law serves to provide adequate compensation to a victim, while economists see it as a way to tilt a company’s cost-benefit calculus so that it doesn’t make tradeoffs in risk (or pollution) that society deems unpalatable. The design of the Pinto exposed the gas tank to rupture in a crash because doing so was cheaper than doing a better job of protecting the gas tank. The fines paid by Ford when they were found guilty more than wiped out its cost savings from the engineering choice.

I completely agree with making Volkswagen buy the high-emission cars as well as imposing a fine on the company that goes above and beyond the estimated environmental damage. However, additional money should not go to the people who bought VW cars, because they’ve not been materially injured, and there’s no societal gain by directing the fine into their pockets.

While simply directing the money to the government’s coffers may be a prescription makes libertarians a bit uncomfortable, in the absence of any real victim there’s no better solution.