Reference no: EM132795028

1.Consider the unilateral model of precaution. Recall that only the injurer can influence accident prevention in this model. Suppose the unit cost of precaution is $1. The probability of an accident is given by ??(??)=??^-0.25x, where ??≥0 is the level of precaution. When an accident occurs, the victim suffers a fixed$100,000 in harm. Assume that courts never err in setting damages. That is, courts award compensatory damages precisely equal to the victim's harm. Punitive damages are not awarded. For simplicity, assume there are no litigation costs.

a. What is the socially optimal level of precaution?

b. What is the socially optimal probability of an accident?

c. What level of precaution does the injurer choose under no liability?

d. What level of precaution does the injurer choose under strict liability?

e. What level of precaution does the injurer choose under a properly designed negligence rule?

f. Given your answers above, which liability rule or rules are efficient?
Assume now that litigation is costly. Litigation costs amount to $50,000 for the injurer and $50,000 for the victim.

g. Given these litigation costs, what is the socially optimal level of precaution?

h. Suppose each party bears her own litigation costs at trial. This means the injurer pays only her own (and not the victim's) litigation costs. What level of precaution does the injurer choose under strict liability?

i. Suppose instead that the injurer bears both parties' litigation costs. What level of precaution does the injurer choose under strict liability?