Space heaters are dangerous. The U.S. Consumer Product Safety Commission estimates that more than 25,000 residential fires
Question:
a. Show that efficiency requires the firm to produce safe space heaters.
b. Suppose the law says that firms are not liable for the damages associated with space heater accidents. Show that the firm will sell only safe space heaters.
c. Now suppose Congress passes a law that says firms are liable for the damages from space heaters, and so on average a firm that sells a standard space heater will have to pay $60 in damages. Show that the firm will produce safe space heaters.
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