This question is based on Mookherjee and Png (1995). You will find it useful to review the class notes on that paper as you work through this question. (10 points) - Consider the model of Mookerjee and Png, with the cost functions c(w)=2w and e()=22. - Assume that there are no penalties for bribery (i.e. =0 ). Suppose that the regulator wants to try a policy of "moral persuasion;" that is, conduct a campaign to encourage people to the right thing voluntarily. There are two such "moral" policies. Policy A: in which the regulator encourages firms to consider the environmental damage of their production. If the policy is effective it means that the firm incurs a cost of h(w), where (0,1). Note that if =1 then the firm would choose a waste level that is optimal for society and there would be no need for regulation, so we will assume that 0 for having bribed. Your goal in this question is to evaluate which policy is better A or B. That is, is it better to encourage firms to internalize (and factor in) their environmental costs, or better to encourage them to feel guilty about paying a bribe. Using backward induction, solve for the sub-game perfect Nash equilibrium of the game under both policies. Specifically, (a) Derive the equilibrium level of bribe b under policy A and B. (b) Use your answer to (a) to derive the best responses of the inspector and the firm under each policy. (c) Determine whether the equilibrium waste is higher or lower under policy A or B. You may use graphs, similar to those we utilized in class, to answer this question. (d) Based on your answer to (c) what does this say about which policy will be more effective, A or B