Suppose that reckless driving imposes costs (in the form of medical bills) on both the drivers themselves and on pedestrians. Each mile of reckless driving costs drivers $1 and pedestrians $0.25. The marginal value to drivers of their reckless driving is indicated by the downward-sloping curve in the following figure:

a. In terms of labeled areas on the graph, what is the social gain from reckless driving? b. Suppose that you could require drivers to pay all the pedestrians' medical bills. According to the graph, how much would social gain increase? c. Explain why, from the viewpoint of economic efficiency, requiring drivers to pay for pedestrians' medical bills might nevertheless be a mistake. In the remainder of this problem, suppose that drivers can acquire airbags that reduce the cost (to them) of their reckless driving from $1 per mile to $0.50 per mile. The cost to pedestrians remains $0.25 per mile, regardless of whether drivers use air bags, and pedestrians pay their own medical bills. d. Suppose you want to predict whether having air bags will increase or decrease drivers' medical costs. Which areas would you want to measure and compare? e. Suppose you want to know whether air bags will increase or decrease the social gains from reckless driving. Which areas would you want to measure and compare? f. Suppose you want to know how much drivers would be willing to pay for airbags. Which areas would you want to measure? g. Suppose you are interested in maximizing social gain, so that you want drivers to buy air bags if and only if the social benefits of the air bags exceed their cost. You cannot tax reckless driving, but you can tax air bags. How much should you tax them?

$/Mile A $1.25 D B C E F $1.00 K G H $.075 P M N O $.050 Q R T S MV Miles of Reckless Driving