Draw a graph as in Figure 12.2 and label the four cost curves W, X, Y, and Z, in that order, from left to right. Assume that firms are risk neutral unless told otherwise, there are no Pigou taxes in place, litigation is always a risk, and the vertical distance between each neighboring set of cost curves is 2. For each of the following firms, indicate the per-unit tax or subsidy that would lead them to the efficient production level.

a) Tree-Huggers Inc., which feels the pain of every environmental cost.

b) Risky-Business Inc., whose love of taking chances gives it a negative risk burden equal to the expected litigation cost.

c) Selfish-Me Inc., which cares only about itself.

d) Sotomayor's-Sis Inc., owned by the sister of a Supreme Court justice who feels immune to litigation risks.

Figure 12.2

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$ per Unit Litigation Risk Burden Expected Litigation Cost Marginal External Cost = Pigou Tax Private Marginal Cost Marginal Benefit Qn QL Q Qprivate Production Level