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It's been estimated that if a truck collides with a car, the damage to the car one is A C = $4,000. There is no damage to the truck.
1. It's been estimated that if a truck collides with a car, the damage to the car one is AC = $4,000. There is no damage to the truck. The probability of a collision is described by p(sT, sC) = (sT2+ sC2)/100,000, where sT is the truck speed and sC is the car speed, in km/h. The maximum speed the vehicles are capable of is 100 km/h.
Each driver can take precautions; assume the only feasible precaution is to reduce the speed. The cost of taking precautions by the truck driver is 4×(100 - sT), that is the truck driver loses $4 value for every 1 km/h slowing down. The cost of taking precautions by the truck driver is 3×(100 - sC), that is the car driver loses $3 value for every 1 km/h slowing down.
a. What are the efficient speeds by each driver? How often do collisions happen (i.e., what is the probability of a collision p) at the efficient speeds?
b. Suppose the rule is strict liability = the truck driver must fully compensate the car owner for the damages no matter how they drive, in case of an accident. What speed would the truck driver choose? What speed would the car driver choose? How often do collisions happen (i.e., what is the probability of a collision p) at these chosen speeds?
c. Suppose the rule is shared liability = the truck driver must compensate the car owner for half of the damages no matter how they drive, in case of an accident. What speed would the truck driver choose? What speed would the car driver choose? How often do collisions happen (i.e., what is the probability of a collision p) at these chosen speeds?
d. If the rule were any other allocation of liability and damages where the truck driver must pay some compensation LT and the car driver assumes the rest of the damages, AC - LT?, would the efficient speeds be chosen by both drivers? Explain.
e. What do you conclude from these examples? I.e., can the efficient outcome be achieved by any ex post allocation of liability and damages? Explain.
