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The expected social cost of an accident

Let w be the marginal cost of precaution, x be the level of precaution, p(x) be the probability of an accident, and A be the accident losses. *Assume unilateral precaution.

True, False, or Uncertain. If the marginal cost of precaution do not rise with the level of precaution taken, the efficient level of precaution (X*) will be less than if the marginal costs of precaution increase with the level of precaution taken. What if accidents costs decrease with precaution? How does this affect the efficient level of precaution? Explain.

Solution Preview

The expected social cost of an accident can be written as,
SC = wx + p(x)A
where w is the per unit cost of precaution, x is the level of precaution, p is the probability
of an accident (and p ...

Solution Summary

The expected social cost of an accident is evaluated.

$2.19