Ziplining - riding a cable between trees on rope rigs is fun for some people, but also dangerous. The risk of dying in a zipline accident is actually very small - for this problem, we will assume it is zero. However, there is a substantial risk of other injuries. There are standard precautions a zipline operator can take - such as using modern equipment, hiring experienced instructors, and taking extra care in rigging - to reduce this risk. The cost of running a zipline business is $150 per customer without these precautions; these precautions cost an additional $100 per customer, and reduce the probability of injury from 1 in 100 to 1 in 300. The average zipline injury does $30,000 worth of harm to the customer. There are five potential customers, each with one opportunity to zipline; the joy each one would get from the zipline is worth $500, $400, $300, $200, and $100, respectively. (That is, the most enthusiastic customer would get a benefit of $500, the second-most-enthusiastic $400, and so on.

(a) What is the efficient level of precaution for zipline operators to take (high or low)?

(b) Given this precaution level, what is the efficient level of activity? (That is, how many customers are there for whom the benefits of riding a zipline outweighs the total costs?)

Suppose there is perfect competition in the zipline industry - there are many operators, with identical costs, so the price of ziplining is driven down to marginal cost plus expected liability payments (if any). For parts (c)-(f), assume that customers correctly perceive and consider the risk of injury when deciding whether to zipline, and can observe the level of precaution taken by each zipline operator.

(c) Under a rule of no liability, what level of precaution will operators take? Why?

(d) Under perfect competition (assumed throughout this problem), what will be the price of zipline?

(e) What will customers perceive as the total cost of zipline? How many customers will choose to zipline?

(f) Are precaution and activity higher, lower, or equal to the efficient levels?

For parts (g)-(j), assume instead that customers are unaware of the risk of injury, and completely ignore it when deciding whether or not to zipline - they simply weigh the financial price against the benefit. Continue to assume the zipline industry is perfectly competitive.

(g) Under a rule of strict liability, what level of precaution will operators take? What will be the price of zipline? How many customers will choose to zipline?

(h) Under a rule of simple negligence (where anything less than the efficient level of precaution is considered negligent), what level of precaution will operators take? What will be the price of zipline? How many customers will choose to zipline?

(i) Under a rule of no liability, what level of precaution will operators take? What will be the price of zipline? How many customers will choose to zipline?

(j) Which of these rules is the most efficient?