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 incurs. 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 this 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 costs of insurance companies?