Problem
Suppose that ChemsAreUs Corporation is contemplating the production of Agent Yellow, an update of defoliant Agent Orange. Agent Yellow has a 10 percent chance of causing $1 billion worth of unintended environmental damage, and a 90 percent chance of causing no damage beyond the intended defoliation. If Agent Yellow is produced and the damage occurs under existing policies and enforcement levels, there is a 30 percent chance that ChemsAreUs will have to pay a $3 billion fine. Discuss the company's incentives for efficient behavior under the following conditions:
(a) ChemsAreUs is risk neutral and faces no threat from activists.
(b) ChemsAreUs is risk averse and the mere possibility of paying the stated fine imposes a $10 million risk burden on the company.
(c) ChemsAreUs is risk neutral, but in addition to the risk of paying a fine, there is a 50 percent chance that environmental activists will organize a successful boycott that causes $40 million worth of losses for the company.
The response should include a reference list. Double-space, using Times New Roman 12 pnt font, one-inch margins, and APA style of writing and citations.