To answer the questions in the picture,

Question 1: The main purpose of monitoring and enforcement is to ensure the desired compliance at the unuc least social costs. The basic formula of monitoring and enforcement is p 2 , where p is the monitoring probability, U11 and Uc are the respective utilities to the agent associated with non-compliance and compliance, and S is the penalty if found in non-compliance. It is easy to demonstrate that when the punishment for a Violation S is innite, the probability of monitoring will be zero. However, in real world, there exists the possibility of Type I error (an issue of false positive), that is, high penalties (but far from innite) could be issued to somebody not guilty of a violation. a) What problems could be caused by false positive? b) What are your proposals for dealing with false positive? Justify your proposals