Story Firms has direct costs of production of 10 per unit sold (that's the marginal cost). Each product sold has risk of causing harms to a third party (not the buyer). The risk of an accident that will cause a loss of 100 will depend on whether firms take care in the manufacture process. The exercise of care raises the marginal cost by 2 (total marginal cost is then 12) and lowers the probability of an accident from 9% to 3%. The cost of care (per unit manufactured) and probability of harms are below: Firms sell output in a perfectly competitive market. The market consists of 5 consumers with values of the product: Assume initially (questions 1-11) that customers have perfect knowledge about the risk and harms of any product being sold. The last questions explicitly relax that assumption. Customer's Knowledge is Imperfect: questions 11 through 13 Suppose now that consumers are imperfectly able to determine risk when purchasing a product. Specifically, suppose consumers can only infer the level of care provided in manufacturer but are unable to determine it directly. Suppose consumers cannot determine risk of individual products sold. There is no liability for harms. What level of care does the manufacturer provide? What is the market price? 12 How many customers purchase the good? Is this efficient? Suppose consumers cannot determine risk of individual products sold. The manufacturers are strictly liability for harms. What level of care does the manufacturer provide? What is the market price? How many customers purchase the good? Is this efficient? Suppose consumers cannot determine risk of individual products sold. The manufacturers are held to a negligence rule for harms where due care is set at "care". Assume that if a product causes harms, after the accident an expert analyst is able to determine if the manufacturer had provided "no care" or "care". What level of care does the manufacturer provide? What is the market price? 12 How many customers purchase the good? 4 Is this efficient? Suppose customers are the victim of harms and they believe the risk of the product harms to be 0.5% regardless of the actual risk. Assume manufacturers face no liability for harms. What level of care does the manufacturer provide? What is the market price? How many customers purchase the good? Suppose customers are the victim of harms and they believe the risk of the product. harms to be 0.5% regardless of the actual risk. Assume manufacturers are strictly liable. What level of care does the manufacturer provide? What is the market price? How many customers purchase the good: Story Firms has direct costs of production of 10 per unit sold (that's the marginal cost). Each product sold has risk of causing harms to a third party (not the buyer). The risk of an accident that will cause a loss of 100 will depend on whether firms take care in the manufacture process. The exercise of care raises the marginal cost by 2 (total marginal cost is then 12) and lowers the probability of an accident from 9% to 3%. The cost of care (per unit manufactured) and probability of harms are below: Firms sell output in a perfectly competitive market. The market consists of 5 consumers with values of the product: Assume initially (questions 1-11) that customers have perfect knowledge about the risk and harms of any product being sold. The last questions explicitly relax that assumption. Customer's Knowledge is Imperfect: questions 11 through 13 Suppose now that consumers are imperfectly able to determine risk when purchasing a product. Specifically, suppose consumers can only infer the level of care provided in manufacturer but are unable to determine it directly. Suppose consumers cannot determine risk of individual products sold. There is no liability for harms. What level of care does the manufacturer provide? What is the market price? 12 How many customers purchase the good? Is this efficient? Suppose consumers cannot determine risk of individual products sold. The manufacturers are strictly liability for harms. What level of care does the manufacturer provide? What is the market price? How many customers purchase the good? Is this efficient? Suppose consumers cannot determine risk of individual products sold. The manufacturers are held to a negligence rule for harms where due care is set at "care". Assume that if a product causes harms, after the accident an expert analyst is able to determine if the manufacturer had provided "no care" or "care". What level of care does the manufacturer provide? What is the market price? 12 How many customers purchase the good? 4 Is this efficient? Suppose customers are the victim of harms and they believe the risk of the product harms to be 0.5% regardless of the actual risk. Assume manufacturers face no liability for harms. What level of care does the manufacturer provide? What is the market price? How many customers purchase the good? Suppose customers are the victim of harms and they believe the risk of the product. harms to be 0.5% regardless of the actual risk. Assume manufacturers are strictly liable. What level of care does the manufacturer provide? What is the market price? How many customers purchase the good
