litigation risk

1. Of the factors determining the need for government involvement in environmental protection, which weigh most heavily in your country? How would you, as a leader, respond to these specific needs?
2. Suppose a lumber company would save $X million on the cost of chemicals and cause $10 million in health costs by secretly substituting arsenic (a carcinogen) for safer, more expensive preservatives in its pressure-treated lumber. The firm estimates that those exposed to the health risk would detect and successfully litigate against the firm with a probability of 20 percent. If arsenic is used, the litigation risk burden for the firm is $1 million, and liability is the only controlling factor (there is no enforceable regulation). If the firm knew in advance what the payment would be if they were found liable, what payment amount would lead the firm to make a socially efficient decision?