I have a few points:
1. There is decent evidence that many other car companies have done something similar. Read this too. Besides, Volkswagen committed a related crime in 1973. When I was a teenager (maybe still?), it was commonly known that New Jersey service stations would help your car pass the emissions test if you slipped them a small amount of money. So we shouldn’t be shocked by the new story. The incentive of the agencies is to get the regulations out the door and to avoid subsequent bad publicity, not to actually solve the problem. So yes, there is a “regulation ought to be tougher” framing, but there is also a “we’ve been overestimating the benefits of regulation” framing too. Don’t let your moral outrage, which leads you to the former lesson, distract you from absorbing some of the latter lesson too.
2. We are more outraged by deliberate attempts to break the law, compared to stochastic sloppiness leading to mistakes and accidents. But it is far from obvious that the egregious violations should be punished more severely in a Beckerian framework. In fact, if they are harder to pull off, compared to sheer neglect, perhaps they should be punished less severely, at least from a utilitarian point of view. I am not saying we should discard our intuitions about relative outrage, but we ought to look at them more closely rather than just riding them to a quick conclusion. I’ve seen it noted rather frequently that the head of the supervisory committee at Volkswagen is named Olaf Lies.
3. Don’t think this is just market failure, it springs from a rather large government subsidy program. Clive Crook makes a good point:
Remember that “clean diesel” was a government-led initiative, brought to you courtesy of Europe’s taxpayers. And, by the way, the policy had proved a massively expensive failure on its own terms even before the VW scandal broke.
…At best, the clean-diesel strategy lowered carbon emissions much less than hoped, and at ridiculous cost; at worst, as one study concludes, the policy added to global warming.
4. One back of the envelope estimate is that the added pollution killed 5 to 23 Americans each year. Now I don’t myself think we should always or even mostly use economic methods to value human lives. But if you wish to play that cost-benefit game, maybe here we have $25 million to $100 million in economic value a year destroyed. It’s not uncommon to spend $100 million marketing a bad Hollywood movie. So in economic terms (an important caveat), this is a small event. Most of the car pollution problem comes from older vehicles with poor maintenance, not fraud on the newer tests. It also seems (same link) that diesel engines are 95% cleaner since the 1980s.
5. The German automobile sector exported about $225 billion in 2014. That’s almost as big as Greek gdp.
6. Manipulated data will be one of the big, big stories of the next twenty years, or longer.
7. It is worth citing Glazer’s Law, which is designed to classify explanations for microeconomic puzzles: “It’s either taxes or fraud”
This one isn’t taxes.