1. ENVIRONMENTAL ECONOMICS – 2e Charles D. Kolstad Copyright © 2011 by Oxford University Press, Inc. C H A P T E R 16 AUDITS, ENFORCEMENT, AND MORAL HAZARD

2. ENVIRONMENTAL ECONOMICS – 2e Charles D. Kolstad Copyright © 2011 by Oxford University Press, Inc. FIGURE 16.1 Illustration of unobserved effort. MD, f = f L, marginal damage, effort at lowest level; MD, f = f*, marginal damage, effort at optimal level; MC, f = f L, marginal cost of abatement, effort at lowest level; MC, marginal cost of abatement, effort at optimal level; a*, efficient level of abatement; a L, second-best level of abatement, with effort at lowest level; f*, efficient level of effort.

3. ENVIRONMENTAL ECONOMICS – 2e Charles D. Kolstad Copyright © 2011 by Oxford University Press, Inc. FIGURE 16.2 Two farmers on a river.

4. ENVIRONMENTAL ECONOMICS – 2e Charles D. Kolstad Copyright © 2011 by Oxford University Press, Inc.

5. ENVIRONMENTAL ECONOMICS – 2e Charles D. Kolstad Copyright © 2011 by Oxford University Press, Inc. FIGURE 16.4 The decision to invest in abatement equipment. T, tight regulation; L, loose regulation. Note: Abatement equipment costs $50 per period. Clean fuel costs $60 per period with tight regulation and $30 per period with loose regulation. Circled actions in period 2 result in the lowest cost to the firm, for each different combination of firm and regulator action.