1. Suppose you rent a boat this summer from a marina on Lake Michigan. The benefit...

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1. Suppose you rent a boat this summer from a marina on Lake Michigan. The benefit you derive from the rental depends on how fast you drive the boat. In addition, the faster you drive the boat, the higher the probability that an accident occurs. The benefit you derive and the probability that an accident occurs for different speeds are provided in the table below. Let the cost of an accident be $400. Speed boat is travelling (mph) Probability of Accident Expected Damages Benefit of renting boat 10 03 100 15 05 140 20 .08 165 25 12 195 30 18 220 35 26 240 40 36 250 a) What happens if the marina faces no liability in regards to an accident? Does an efficient outcome occur with no liability? Explain. b) What happens if the marina has strict liability? Does an efficient outcome occur with strict liability? Explain c) What happens if there is a simple negligence rule requiring you to pay for damages if you are driving greater than or equal to 20 mph? Does an efficient outcome occur? Explain. d) What simple negligence rule would you propose to reach efficiency? Now along with you being able to reduce the probability of an accident by reducing your speed, the marina can also reduce the probability of an accident by making certain routine maintenance and safety checks of the boat. e) Given that both the marina and you can take actions to reduce the probability of an accident, would an efficient outcome likely be achieved through some type of liability rule? What about through a negligence rule? Explain. Now along with you being able to reduce the probability of an accident by reducing your speed, the marina can also reduce the probability of an accident by making certain routine maintenance and safety checks of the boat. e) Given that both the marina and you can take actions to reduce the probability of an accident, would an efficient outcome likely be achieved through some type of liability rule? What about through a negligence rule? Explain. f) If the courts were forced to implement a no liability or a strict liability rule, explain the factors which would influences which rule would result in greater efficiency. 2. Frequent power outages trouble the residents of Storm City. Located in the center of the storm belt, the city experiences periodic windstorms that down trees and power lines. The tables below give some data about the likelihood of power outages and the consequences. (For example, the "more inspections" row of the table indicates that if the Power company chooses to do tree trimming and more inspections, the probability of an outage will be 2, and the marginal reduction in the probability of an outage due to "more inspections" is .1). As you can see there are actions that the power company can take to reduce the probability of an outage, and actions that households can take to reduce the costs of the outage. probability Additional Action taken Actor marginal cost of of outage additional action none tree trimming power company 0.4 power company 0.3 $150 more inspections power company 0.2 $250 better transformers power company 0.1 $350 Additional Action taken Actor costs of marginal cost of outage additional action none households $5,000 candles, flashlights households $4,000 $150 eliminate freezer households $3,000 $200 replace electric heat households. $2,000 $300 back-up generators households $1,000 a) Suppose that the Power company has no liability for damages due to power outages. What actions will be taken by each party? Compute the total costs of this situation. b) Suppose, on the other hand, that the power company is strictly liable for all outage-related damages. What actions will be taken by each party? Compute the total costs of this situation. Is this an improvement over the situation in parta? c) Suppose that there is a simple negligence rule that assigns liability to the power company only for failure to trim trees. What actions will be taken by each party? Compute the total costs of this situation. Is this an improvement over the situation in parts a and b? replace electric heat back-up generators households households $2,000 $300 $1,000 a) Suppose that the Power company has no liability for damages due to power outages. What actions will be taken by each party? Compute the total costs of this situation. b) Suppose, on the other hand, that the power company is strictly liable for all outage-related damages. What actions will be taken by cach party? Compute the total costs of this situation. Is this an improvement over the situation in part a? c) Suppose that there is a simple negligence rule that assigns liability to the power company only for failure to trim trees. What actions will be taken by each party? Compute the total costs of this situation. Is this an improvement over the situation in parts a and b d) Propose a negligence rule that will bring about the efficient set of actions, that is, the set of actions by the power company and the households that minimizes the total cost of this tort situation. 1. Suppose you rent a boat this summer from a marina on Lake Michigan. The benefit you derive from the rental depends on how fast you drive the boat. In addition, the faster you drive the boat, the higher the probability that an accident occurs. The benefit you derive and the probability that an accident occurs for different speeds are provided in the table below. Let the cost of an accident be $400. Speed boat is travelling (mph) Probability of Accident Expected Damages Benefit of renting boat 10 03 100 15 05 140 20 .08 165 25 12 195 30 18 220 35 26 240 40 36 250 a) What happens if the marina faces no liability in regards to an accident? Does an efficient outcome occur with no liability? Explain. b) What happens if the marina has strict liability? Does an efficient outcome occur with strict liability? Explain c) What happens if there is a simple negligence rule requiring you to pay for damages if you are driving greater than or equal to 20 mph? Does an efficient outcome occur? Explain. d) What simple negligence rule would you propose to reach efficiency? Now along with you being able to reduce the probability of an accident by reducing your speed, the marina can also reduce the probability of an accident by making certain routine maintenance and safety checks of the boat. e) Given that both the marina and you can take actions to reduce the probability of an accident, would an efficient outcome likely be achieved through some type of liability rule? What about through a negligence rule? Explain. Now along with you being able to reduce the probability of an accident by reducing your speed, the marina can also reduce the probability of an accident by making certain routine maintenance and safety checks of the boat. e) Given that both the marina and you can take actions to reduce the probability of an accident, would an efficient outcome likely be achieved through some type of liability rule? What about through a negligence rule? Explain. f) If the courts were forced to implement a no liability or a strict liability rule, explain the factors which would influences which rule would result in greater efficiency. 2. Frequent power outages trouble the residents of Storm City. Located in the center of the storm belt, the city experiences periodic windstorms that down trees and power lines. The tables below give some data about the likelihood of power outages and the consequences. (For example, the "more inspections" row of the table indicates that if the Power company chooses to do tree trimming and more inspections, the probability of an outage will be 2, and the marginal reduction in the probability of an outage due to "more inspections" is .1). As you can see there are actions that the power company can take to reduce the probability of an outage, and actions that households can take to reduce the costs of the outage. probability Additional Action taken Actor marginal cost of of outage additional action none tree trimming power company 0.4 power company 0.3 $150 more inspections power company 0.2 $250 better transformers power company 0.1 $350 Additional Action taken Actor costs of marginal cost of outage additional action none households $5,000 candles, flashlights households $4,000 $150 eliminate freezer households $3,000 $200 replace electric heat households. $2,000 $300 back-up generators households $1,000 a) Suppose that the Power company has no liability for damages due to power outages. What actions will be taken by each party? Compute the total costs of this situation. b) Suppose, on the other hand, that the power company is strictly liable for all outage-related damages. What actions will be taken by each party? Compute the total costs of this situation. Is this an improvement over the situation in parta? c) Suppose that there is a simple negligence rule that assigns liability to the power company only for failure to trim trees. What actions will be taken by each party? Compute the total costs of this situation. Is this an improvement over the situation in parts a and b? replace electric heat back-up generators households households $2,000 $300 $1,000 a) Suppose that the Power company has no liability for damages due to power outages. What actions will be taken by each party? Compute the total costs of this situation. b) Suppose, on the other hand, that the power company is strictly liable for all outage-related damages. What actions will be taken by cach party? Compute the total costs of this situation. Is this an improvement over the situation in part a? c) Suppose that there is a simple negligence rule that assigns liability to the power company only for failure to trim trees. What actions will be taken by each party? Compute the total costs of this situation. Is this an improvement over the situation in parts a and b d) Propose a negligence rule that will bring about the efficient set of actions, that is, the set of actions by the power company and the households that minimizes the total cost of this tort situation.