Question

John like to drive cars really fast. The faster he goes the more he enjoys, but also the higher the chances of getting in accident.

a) John wants to use the cost benefit principle to decide how fast to go.and he asks for your help. Explain in your words how John's decision on speed should be made according to the Cost-Benefit principle.

b) Use your answer to a) to answer the following question. Do you think the use of mandatory seatbelts in cars that reduce the severity of an accident is likely to make people drive faster or slower? Why

Answer 1

a) Since john like to drive cars really fast, faster he goes more he enjoys so his utility or we could say benefit or satisfaction increases with the speed. And there are higher risks of getting an accident too at a higher speed so with an increase in speed there is also an increase in risk or we cay say the cost. The cost-Benefit principle says that an individual should choose that point of consumption where the marginal benefits are equal to the marginal cost of consumption. Therefore john's decision of speed should be at a point where his marginal benefits from driving fast are equal to the Marginal cost of driving fast.

b) The mandatory use of seatbelts in cars reduces the severity of an accident is likely to make people drive faster because as we have seen in Part-a, such mandate will increase the marginal benefit of John from driving fast. So now when Marginal benefit is more than Marginal cost the people tends to drive at a higher speed until the Marginal cost equals marginal benefit.