Answer to Question #214519 in Microeconomics for Momo

Question

The Minister of Transport released its Festive season road accident statistics which shows that the probability of drivers committing an accident is 8% with utility , where H stands

for year income.

The Minister further claims these Festive season road accidents cost the state (in terms of claims lodged) an average of R84 000 per annum. The Road Accident Fund is an insurance scheme providing compulsory indemnity cover to victims of vehicle accidents and taxi drivers.

(c)Due to high accident rates in South Africa during the Festive season, the Road Accident

Fund has issued a warning to government that the fund will be insolvent soon. Advise the Minister on the cost of insurance that can collapse the scheme.

Answer 1

Solution:

The cost of insurance that can collapse the scheme includes road accident claims to crash victims, including exorbitant legal fees for the same.

The high accident rates in South Africa during the festive season will result in too many accidents, which will ultimately result in billions in road accident claims being paid to crash victims. Therefore, the claims being paid out will increase the scheme’s expenses which will be more than its income, resulting in massive losses. As such, the scheme will lack sufficient funds to pay road accident victims and thus become insolvent in the long run.