-The expected damage to innocent third parties per unit of the good produced is shown as the "external cost" in Figure 27.1. An unregulated competitive market for the product produces a quantity of Q* units, which sell for a price of P* per unit. The amount producers of this product could reasonably afford to spend per unit produced in order to successfully insulate themselves from possible just and reasonable jury awards in lawsuits is

Question

Quizplus · Accepted Answer

Producers could reasonably afford to spend an amount equal to the external cost per unit produced to insulate themselves from possible lawsuits, as this is the expected damage their product causes to innocent third parties. This expenditure would essentially internalize the external cost, aligning their private costs with the social costs of production.

-The Expected Damage to Innocent Third Parties Per Unit of the Good