2.2 Wait and See
If the event does not occur then, as above, the tax rate in the second period is simply τ2 = b2/y2. When no action is taken in the first period, and the event does occur, the tax rate needed to finance C is denoted C/y2 so that the tax rate in the second period becomes:
(4)
The expected value of social welfare from waiting, E (W | wait) is expressed as:
(5)