Question

Suppose that the probability of an accident occurring depends on the level of care given by the injurer. The harms from the accident are evaluated to be 1000, while the probability of that accident occurring are as follows: Probability of Harm Cost of Care Level of Care 50% 0 None 16% 120 Low 6% Medium 150 2% 250 High

Answer 1

Let , x=the dollar expenditure on care by the injurer

L(x) = expected accident losses suffered by the victim

L(x) = P(x)D(x)

Here,

P = the probability of an accident

D = actual damages in the event of an accident

since both of the functions are decreasing at a decreasing rate, the product L would also decrease at at a decreasing rate.

a) The efficient level of care would be High

b) Under the rule of strict liability, the injurer faces the actual damages to the victim. so the private costs coincide with the social costs. Thus, the injurer chooses x*.

Under the negligence rule, the injurer tries to avoid liability when the set standards are getting exceeded, ie if the expenditure crosses the optimal care level.

Thus, under the negligence rule the injurer will choose x*.