Now we add to the problem the possibility of precaution by the victims. The table below gives the possibilities for the households.

Action taken                   Actor costs of costs of

outage action

none households                      $5,000 $0                                   

candles and flashlights households                        $4,000 $150

eliminate freezer             households                      $3,000                $200

replace electric heat        households                      $2,000                $300

back-up generators          households                      $0 $1,000                                         

a. Write down an expression for the sum of the costs to be minimized.

b. Suppose that there is no liability for damages due to power outages. What actions will be taken by each party? Compute the total costs of this situation.

c. Suppose, on the other hand, that the power company is liable for outage-related damages. What actions will be taken by each party? Compute the total costs of this situation. Is this an improvement over the situation in part b?

d. Suppose that there is a simple negligence rule that assigns liability to the power company only for failure to trim trees. What actions will be taken by each party? Compute the total costs of this situation. Is this an improvement over the situation in parts b and c?

e. Find the efficient mix of precautionary actions. (optional)

f. What liability rule brings about the efficient set of actions?