Assume that the strict liability rule holds and a potentially polluting firm is risk averse. Define
Question:
Assume that the strict liability rule holds and a potentially polluting firm is risk averse. Define ŷ implicitly by ŷ= asl s (ŷ) + D, where asl s (ŷ) is the solution to the solvent firm’s problem and ŷ divides wealth into (privately) optimal solvent and insolvent regimes. Characterize the optimal choice for care as a function of wealth. More precisely, show that there exist wealth levels y0, y1, and y2 with y0
(a) the firm engages in no care so that asl(y)=0 for y≤y0, for some y0≥0.
More precisely, if ρ(0)=1, then asl(0)=0 and asl(y)>0 for y>0. If ρ(0)<1, then y≤y0;
(b) asl(y) is increasing in y for y02 and:
(i) asl(y)* for y1 (ii) asl(y)=a* for y=y1, and if the firm is risk neutral, also for y>y2. If the firm owner is risk averse, then for y>y2 the solution asls(y) can be smaller or larger than the social optimum
(iii) asl(y)>a* for y12;
(c) the cutoff level of wealth ŷ= asl s (ŷ) + D dividing private solvency and insolvency can be larger or smaller than the socially optimal division.
Step by Step Answer:
A Course In Environmental Economics
ISBN: 9781316866818
1st Edition
Authors: Daniel J Phaneuf, Till Requate