Imperfect Information

Abstract

A welfare-maximizing decision by individual customers as to whether to consume transportation, and which railroad or mode they wish to patronize presupposes that they are fully informed about the safety choices that are available. If customers misperceive the preventive efforts made by railroads and other transportation firms, they may make mistaken demand decisions. Some customers may be scared away from using rail transportation on the mistaken belief that it is less safe than it really is. Others may mistakenly patronize a firm or mode that is less safe than they would desire. Because customers do not accurately express their desires for safety preferences in their demand decisions, railroads will be sent the wrong signals about the preferences of customers. It is therefore likely that the “wrong” amount and variety of safety will be offered in the marketplace.