Consider a society where people throw garbage on the streets. A person who does so inflicts negative externalities on others: suppose that the (psychic) dollar cost to any one person is an, where a > 0 is a positive constant and n is the number of (other) people who throw garbage on the streets. Assume that your own act of throwing garbage on the street gives you a (psychic) dollar "convenience gain" of G, (because you don't have to wait for the next trash can) and a (psychic) dollar "shame loss" of c/n, where c > 0 and n, again, is the number of other garbage throwers (the idea is that the shame is smaller the more the number of other garbage throwers).

A. [4 points]Show that nobody throwing garbage on the streets is always an equilibrium in this example.

B. [5 points] Show that there is a threshold population size such that if population exceeds this threshold, everybody throwing garbage on the streets is also an equilibrium. Why is the threshold dependent on the parameters G and c, but independent of a? Explain intuitively.

C. [4 points] Starting from a situation where everybody is throwing garbage on the streets, assess the chances of moving to the good equilibrium of part (a) overnight. Why do you consider such a move unlikely?

D. [5 points] Consider a policy that imposes a fine F > 0 on every garbage thrower. Show that the threshold population required to support the bad equilibrium must rise with the fine.

E. [4 points] Suppose that the fine is such that the actual population falls below the threshold. In this case, discuss why the fine policy may be removed after a few years with a permanent change implemented in social norms.