100 Economics Question of the Day: An Intermittent Blog: If We Were All Rational, would everyone be speeding?

Monday, October 16, 2006

If We Were All Rational, would everyone be speeding?

Thought-experiment: assume that all cars work perfectly, that law enforcement is not absolute, and that people are strictly rational. Would not one then conclude that the optimum speed i at which one should drive, given p(x) as the probability of receiving a ticket for speeding and s(x) is the level of the speeding fine, is:



Given that p(x) at i=56 <> 1, no rational driver would drive at or below the speed limit.

The proximate reason for this thought is the exchange between Mark Pauly and Kenneth Arrow on the matter of "moral hazard," in which both appear to conclude that social stigma alone are not a matter of governance.

1 Comments:

Blogger PunditusMaximus said...

That assumes I'm risk-neutral, but risk-aversion of course carries a similar result.

The real issue is explaining to small children in the car why some rules are for adults to bend and others are for children to follow completely.

05 May, 2008 13:14  

Post a Comment

Links to this post:

Create a Link

<< Home