Amanda, a homeowner, discovers that the crime rate in her neighbourhood is increasing. In fact, it is so bad, the local insurance industry will not sell property insurance with theft coverage to her.

a). draw a diagram showing the marginal benefit of crime prevention Amanda applies against the marginal cost she occurs. Explain the significance of equilibrium in this model.

b). draw a diagram showing the impact of increased police surveillance in Amanda's neighbourhood on Amanda's marginal benefit and marginal cost curves. Explain why equilibrium changes

c). show what happens to Amanda's marginal benefit and marginal cost curves in the diagram if she could buy theft insurance. What does this do to her standard of care to prevent theft? Why does the graph shift in the direction it does? Explain what phenomena is at work in the shift. How would a market of such homeowners effect the cost of insurance companies?

d). if the insurer introduces a deductible for theft loss or a loss splitting term into the insurance contract, what effect will this have on the marginal benefit curve of the homeowner? What other contractual terms might be added to minimize the cost of theft to the homeowner? The insurance company? the society?