BU353 Chapter Notes - Chapter 6: Cash Flow, Opportunity Cost, Product Liability
Document Summary
Loss control refers to efforts that reduce expected losses. Finding the optimal level of loss control requires consideration of both the benefits and the costs of additional loss control activities. Numerous activities reduce expected losses by reducing the frequency of losses ex. A family building a fence to prevent their child from getting hit by a car. Businesses reduce the probability of being sued under products liability law by designing, manufacturing, and marketing safe products. An extreme example of loss prevention is to avoid completely the activity that potentially gives rise to the loss loss avoidance . The cost of loss avoidance is the sacrifice of the benefits from the activity that give rise to the potential loss. Loss avoidance would imply that the benefits from the risky activity are less than the costs of the risky activity. Loss reduction activities that reduce expected losses by decreasing the size of the loss conditional on a loss occurring.
