14
Chapter 14: In-Class Activity
Freakonomics: Insurance for Subway
Fare Evaders
Insurance for Subway Fare Evaders (1/2)
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In Stockholm, one subway rider trained his dog to jump up and down
until it would activate the sensor, allowing the rider to enter without
paying.
Over 40,000 commuters a day ride the subway in Stockholm without
paying for the $100 monthly pass.
Fare dodgers who are caught face a fine of about $160.
The non-profit organization Planka.nu was formed with the mission
of persuading as many people as possible to evade subway fares in
Sweden.
Goolsbee/Levitt/Syverson, Microeconomics, 3e, © 2020 Worth Publishers
Insurance for Subway Fare Evaders (2/2)
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Planka.nu offers an insurance plan to people who are willing to
sneak into the subway.
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For $11 a month, Planka.nu will pay the fine if a commuter is caught.
Planka.nu earns about $7,500 a month from the insurance plan.
The insurance program is profitable because detection rates are low.
In India, transit authorities pressured officials to illegalize this type of
insurance.
To stop this behavior using economics, the marginal cost of riding
the subway without paying must be greater than the marginal
benefit.
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One method is to hire more people to check that riders on trains have
tickets.
A plan was recently announced to double the number of ticket checks
conducted.
Goolsbee/Levitt/Syverson, Microeconomics, 3e, © 2020 Worth Publishers
QUESTION 1
Liam is considering riding the subway without paying. He calculates his
risks of being caught and determines that there is a 60% probability
that he will save $100 a month and a 40% probability that he will save
$0 a month by not paying for his monthly pass.
What is Liam’s expected value of monthly savings?
a) $0 a month
b) $20 a month
c) $40 a month
d) $60 a month
Goolsbee/Levitt/Syverson, Microeconomics, 3e, © 2020 Worth Publishers
QUESTION 1: ANSWER
Liam is considering riding the subway without paying. He calculates his
risks of being caught and determines that there is a 60% probability
that he will save $100 a month and a 40% probability that he will save
$0 a month by not paying for his monthly pass.
What is Liam’s expected value of monthly savings?
a) $0 a month
b) $20 a month
c) $40 a month
d) $60 a month (correct answer)
Goolsbee/Levitt/Syverson, Microeconomics, 3e, © 2020 Worth Publishers
QUESTION 2
Liam’s utility of saving $100 is 10, and his utility of saving $0 is 0. By
riding the subway without paying, there is a 60% probability that he will
save $100 a month and a 40% probability that he will save $0 a month.
What is Liam’s expected utility?
a) 0
b) 4
c) 6
d) 10
Goolsbee/Levitt/Syverson, Microeconomics, 3e, © 2020 Worth Publishers
QUESTION 2: ANSWER
Liam’s utility of saving $100 is 10, and his utility of saving $0 is 0. By
riding the subway without paying, there is a 60% probability that he will
save $100 a month and a 40% probability that he will save $0 a month.
What is Liam’s expected utility?
a) 0
b) 4
c) 6 (correct answer)
d) 10
Goolsbee/Levitt/Syverson, Microeconomics, 3e, © 2020 Worth Publishers
QUESTION 3
Riding the subway without paying, Liam faces an expected savings of
$60 per month and an expected utility of 6. However, Liam is riskaverse. The relationship between the utility he receives from saving
money and the amount saved is plotted on the accompanying graph.
Click on the point that represents Liam’s certainty equivalent to
his expected value of monthly savings and expected utility.
Goolsbee/Levitt/Syverson, Microeconomics, 3e, © 2020 Worth Publishers
DISCUSSION QUESTION 1
The relationship between the utility Liam receives from saving money
and the amount saved is plotted on the accompanying graph.
If Planka.nu charges $24 for its insurance, should Liam enroll in
the program?
Goolsbee/Levitt/Syverson, Microeconomics, 3e, © 2020 Worth Publishers
QUESTION 4
Stockholm transport has announced a plan to increase the number of
ticket checks conducted. Suppose new security checks increase the
probability of being caught riding the subway without paying to 1%. The
fee for apprehension remains unchanged at $160.
If the average subway rider uses the subway 50 times a month,
what premium will Planka.nu charge if it is actuarially fair?
a) $25 a month
b) $50 a month
c) $80 a month
d) $100 a month
Goolsbee/Levitt/Syverson, Microeconomics, 3e, © 2020 Worth Publishers
QUESTION 4: ANSWER
Stockholm transport has announced a plan to increase the number of
ticket checks conducted. Suppose new security checks increase the
probability of being caught riding the subway without paying to 1%. The
fee for apprehension remains unchanged at $160.
If the average subway rider uses the subway 50 times a month,
what premium will Planka.nu charge if it is actuarially fair?
a) $25 a month
b) $50 a month
c) $80 a month (correct answer)
d) $100 a month
Goolsbee/Levitt/Syverson, Microeconomics, 3e, © 2020 Worth Publishers
DISCUSSION QUESTION 2
To reduce the number of people riding the subway in Stockholm
without paying, are there any other economic solutions that
could be tried?
Goolsbee/Levitt/Syverson, Microeconomics, 3e, © 2020 Worth Publishers