Consider the problem of inducing firms to reveal information about their cost of reducing their…

Consider the problem of inducing firms to reveal information about their cost of reducing their pollution.

(b) Still in the single-firm context, suppose that the firm can refuse to participate (it has property rights and is free to pollute if it wants to). Can the first-best outcome still be implemented if the government cares about the sum of consumer surplus and producer profit? Next, suppose that the government faces a shadow cost of public funds λ > 0, so that its objective function is