Many people fail to buy auto liability insurance voluntarily. Many other drivers are uninsured for medical expenses/loss of income that could result from an accident. To some extent, this lack of coverage might simply reflect that some people might not have the money fo pay for insurance, or that they possibly might underestimate the risk to loss so that insurance looks like a bad deal. But a major reason people fail to buy these coverage is that part or most of the costs of accidents will fail on other parties. For example, a driver with few assets is essentially judgment proof and thus has a limited economic incentive to buy liability coverage. Similarly, if an uninsured person will receive medical care if injured in an automobile accident with costs paid by other parties, the person will have much less incentive to buy insurance.
Economic arguments for compulsory insurance laws in these cases focus on the possibility that compulsory insurance can reduce the cost of risk by getting people to consider more of the costs of their actions when deciding whether to drive, what kind of car to buy how safely to drive and so on. However, many observers have criticized compulsory insurance laws in theory and in practice on a number of dimensions. We will firstly briefly review the economic rationale for compulsory insurance and then turn to some of these criticisms. We also will point out the effects of the laws on the revenues and costs of various parties and briefly introduce you to the issue of whether these laws are fair.
Economic Rationale; We begin by ignoring the issue of how safely people might drive if they are not insured for liability or their own economic losses and instead focuses exclusively on the effects of compulsory insurance on the decision to drive. The key ideas is as follows; Without compulsory insurance, some people will drive even though the full costs that arise when they drive exceed their benefits from driving. Compulsory insurance will make some of these people give up driving, thus reducing the cost of the risk.
Assume for example, that the cost to Jack of having a car and driving compared to relying on alternative transportation is 150$ per month. This amount includes the cost of the car, gas and the expected costs of uninsured accidents that would be borne by Jack or any insurance that Jack has purchased against these losses. Also assume that the expected cost of harm to others when Jack drives without auto liability and medical coverage is 50$ per month. This would include the expected damage to others from Jack’s negligence and any expected medical expenses for Jack that would be borne by other parties. Thus, the total expected costs when Jack drives are 200 $ per month.
From the above discussion you might have got the idea that why auto insurance is compulsory for all. So to lead a depression free and tension free life auto insurance is very much important for all.
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