Question

What are the implications of government regulation to reduce risk on a perfectly functioning labor market?"

Answer 1

The figure shows the implication of government regulation to reduce risk on a perfectly functioning labor market

Person A is very averse to the risk of injury, hence he/she works for firm X at W_AX and R_AX ,with his/her utility maximized at A₂

. • Person B is not averse to the risk of injury, hence he/she works for firm Y at W_BY and R_BY with his/her utility maximized at B₂ .

• If OSHA introduces a standard that makes risk levels above RAX as illegal, Person B would be adversely affected because the best wage offer he/she can get at the mandated/decreed risk – R_AX – is W_AX.

The mandated risk level will put Person B on B1 and this will generate less utility if compared to firm Y ’s offer of W_BY and R_BY