A lumber company would cause $10 million worth of health costs by secretly substituting arsenic (a carcinogen)

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A lumber company would cause $10 million worth of health costs by secretly substituting arsenic (a carcinogen) for safer, more expensive preservatives in its pressure-treated lumber. The estimated probability that victims will discover the use of arsenic and successfully litigate against the firm is 20 percent. If arsenic is used, the litigation risk burden for the firm is $1 million. Liability is the only threat to the firm because no enforceable regulation is in place. What is the size of the damage award that, if known in advance, would lead the firm to make the socially efficient choice?

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