Suppose that your city government is interested in reducing littering. Currently, there is a $ 100 fine for littering and there is a 10 percent probability of being caught if you litter. The city is deciding between two different policies: (1) It can increase the number of police that monitor littering, which would make the probability of being caught if you litter 20 percent rather than 10 percent; or (2) it can keep the monitoring the same yet raise the fine for littering from
$ 100 to $ 200. If litterers are risk averse, which policy would lead to a larger reduction in littering? What if litterers are risk loving (that is, they have a concave utility function, and so prefer an uncertain outcome to the certain outcome with the same expected value)?

  • CreatedMarch 25, 2015
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