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There is a large literature on the economics of accident law. Shavell (1987) and Landes and Posner (1987) are thorough book-length treatments. The analysis of the second-best negligence rule in this chapter is inspired by Polinksy (1980), who studies a slightly different situation in which the harm that is caused by injurers occurs as a lump sum, rather than as a per unit social cost. Shavell (1982) studies the interaction between liability rules and insurance markets. White and Wittman (1983) and Weitzman (1974) are the classic papers on the comparisons of tax and quantity instruments under uncertainty.
1. In this chapter we assumed that all injurers and victims are identical. In reality, this will not be the case. To see how heterogeneity among potential injurers might alter the efficiency properties of simple negligence rules, consider a simple modification of the unilateral care model. Everything else is the same, but now assume that the injurers differ in their marginal costs of care, w.
For simplicity, suppose that there are only three types of injurers, labelled 1, 2 and 3, and suppose that there is an equal proportion of each type in the population. Assume that type 1 injurers have a marginal cost of w1, type 2 injurers have a marginal cost of w2 , and that type 3 injurers have a marginal cost of w3, with:
If actual care taken a x *, then the injurer is not liable If actual care taken < x* then the injurer is liable
Will this reasonable person negligence rule induce either types 1, 2 or 3 to take an efficient level of care? (Remember, in general it will be efficient for different types to take different levels of care).
Consider the unilateral care model, and suppose that there are three possible due standards that the injurer believes he might face: za = 2, zb = 3 and zc = 4. Let:
be the injurer's perceived probability beliefs of facing each possible due standard, with na +nb +nc = 1. Let x be the level of care chosen by the injurer. Assume that the injurer is risk neutral.
(a) If x < za, what is the probability that the injurer believes he will be found to be negligent?
where u is a random variable which takes on the values 1 and -1 with equal probability. The actual marginal social cost curve is:
where v is a random variable which takes on the values 1 and -1 with equal probability. Assume that u and v are statistically independent. The regulator knows the values B0 and C0, but cannot observe the realisations of u or v.
Let x be the point where expected marginal private benefits equal expected marginal social costs, and consider the following three policy options that are available to the regulator:
For each form of regulation, illustrate the expected deadweight loss diagrammatically, and compute it analytically. In each case, explain how the expected deadweight losses depend on B0 and C0, if at all. Rank the policy options according to the expected deadweight loss that they create, and explain why your ranking makes economic sense. For the regulator to choose the efficient policy, does it need to know B0 and C0?
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