ECON 522 ASSIGNMENT QUESTION

Consider the following setting of bilateral precaution. Bicyclists who ride at night can reduce the risk of getting hit by a car by wearing reflective vests. Drivers can reduce the risk of hitting a bicyclist by installing HID (High Intensity Discharge) headlights, which are brighter than normal headlights. Imagine there’s only one driver and one bicyclist, and the likelihood of an accident is as follows:

Injurer Precaution

Normal Headlights

HID

Headlights

No Vest

8%

3%

Vest

5%

1%

Victim Precaution

The damage done by an accident is $1,000, and compensation is perfect. Reflective vests cost $15, and HID bulbs cost $30. There is no insurance – drivers bear their own liability costs.

(a) What is theefficient level of precautionby both sides? (No calculus needed, just compute the total social cost – expected cost of accidents plus precaution – under the four possible combinations.)

(f) What levels of precaution will a rule ofstrict liabilitylead to?

(g) Show that, regardless of what the bicyclist does, it’s efficient for the driver to use HID bulbs; and regardless of what the driver does, it’s efficient for the bicyclist to wear a vest.

(h) What levels of precaution would a rule ofstrict liability with a defense of contributory negligencelead to?

(b) Who bears theresidual risk of accidents(pays the cost of those accidents that still occur) under simple negligence? What about under strict liability with a defense of contributory negligence?

(c) What can you say about the levels ofdriver and bicyclist activityunder these two rules?