A city is considering how much to spend to hire people to monitor its parking meters. The following information is available to the city manager:
● hiring each meter monitor costs $10,000 per year.
● with one monitoring person hired, the probability of a driver getting a ticket each time he or she parks illegally is equal to 0.25.
● with two monitors, the probability of getting a ticket is 0.5; with three monitors, the probability is 0.75; and with four, it’s equal to 1.
● with two monitors hired, the current fine for overtime parking is $20.
a) Assume first that all drivers are risk neutral. What parking fine would you levy, and how many meter monitors would you hire (1, 2, 3, or 4) to achieve the current level of deterrence against illegal parking at the minimum cost?
b) Now assume that drivers are highly risk averse. How would your answer to (a) change?
c) What if drivers could insure themselves against the risk of parking fines? Would it make good public policy to permit such insurance?