1.You have been hired as a consultant for a government agency that is tasked with enforcing environmental regulations. The agency currently estimates that it conducts enough inspections to catch about 1/5 of the firms that emit more than their allowed limit. If it catches a firm polluting over the limit, the fine is $20,000.

a.If the agency's fine is efficient, what is the implied cost to society each time a firm pollutes over its limit?

b.An industry group is lobbying to impose a maximum fine of $12,000 each time a firm pollutes over its limit. What percentage of non-compliant firms would the agency need to catch in order to have this be the efficient fine?

c.Why might the agency not want to impose very high fines even without the industry group lobbying it?

The agency is asking you to try to understand whether its enforcement activities are effective at reducing pollution. What is one difficulty in understanding this relationship and what is one approach you might take to dealing with that difficulty?