Tort Law – In Class Exercise
Public Policy and Business – Spring 2007
Mr. A is a potential victim of an accident.
Ms. B is a potential injurer in this accident.
Dollar
damages, should an accident occur, are
D = $1,000,000
The probability that the accident will occur depends upon the level of care taken by Mr. A,
denoted by the symbol x, and the level of care taken by Ms. B, represented by the symbol y.
Both Mr.
A and Ms. B may choose integral levels of care between 0 and 5.
At different levels of joint care we
have the following probabilities that an accident will occur:
p(x,y) =
y=0
y=1
y=2
y=3
y=4
y=5
x=0
0.200
0.100
0.060
0.030
0.020
0.015
x=1
0.120
0.060
0.035
0.015
0.011
0.009
x=2
0.080
0.040
0.020
0.011
0.007
0.005
x=3
0.060
0.025
0.015
0.008
0.004
0.002
x=4
0.050
0.018
0.011
0.006
0.002
0.001
x=5
0.045
0.016
0.010
0.005
0.001
0.000
The costs of different levels of care are given by A(x) and B(y).
For this problem we assume:
A(x)
B(y)
x=0
0
y=0
0
x=1
500
y=1
500
x=2
1500
y=2
2000
x=3
5000
y=3
6000
x=4
10000
y=4
12000
x=5
16000
y=5
20000
1.
Complete the following table, showing the social cost associated with this accident at each care
level.
L(x,y) = p(x,y)D + A(x) + B(y)
y=0
y=1
y=2
y=3
y=4
y=5
x=0
100500
62000
36000
32000
35000
x=1
120500
61000
37500
21500
29500
x=2
81500
23500
26500
x=3
65000
30500
22000
19000
21000
27000
x=4
60000
28500
23000
24000
31000
x=5
61000
32500
28000
27000
29000
2.
In this case, assuming zero transactions costs, Mr. A and Ms B will negotiate
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 Spring '09
 HOLLAND
 Tort Law, Mr. A, Ms. B

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