CHOICE THEORETIC PROBLEMS ARE DIVIDED INTO TWO CLASSES: PROBLEMS IN WHICH THE CONSEQUENCES OF ALTERNATIVE COURSES OF ACTION (CHOICES) ARE DETERMINISTIC AND PROBLEMS IN WHICH CHOICES ARE ASSOCIATED WITH STOCHASTIC CONSEQUENCES. FOR CHOICE PROBLEMS WITH STOCHASTIC CONSEQUENCES, ECONOMISTS HAVE COME TO RELY UPON THE EXPECTED UTILITY THEOREM. THIS THEOREM CONSISTS OF A SET OF AXIOMS CONCERNING THE STRUCTURE OF AN INDIVIDUAL'S PREFERENCES, WHICH IF SATISFIED, IMPLY THAT CHOICES AMONG UNCERTAN COURSES OF ACTION ARE MADE AS IF THE INDIVIDUAL WERE MAXIMIZING EXPECTED UTILITY. THE FIRST SECTION OF THIS ANALYSIS FOCUSES ON THE CASE WHERE PUNISHMENT FOR ARSON IS BY FINE ONLY. THE SENSITIVITY OF INCENDIARY ACTIVITY TO SEVERAL POLICY CHANGES IS INVESTIGATED. IN THE FOLLOWING SECTION, PRISON SENTENCES ARE ADDED TO FINES AS A POSSIBLE PUNISHMENT, AND THE EFFECTS OF THE SAME POLICY CHANGES ARE EXPLORED. THE EFFECT OF INCLUDING BOTH SENTENCES AND FINES AS PENALTIES IS TO FURTHER COMPLICATE PENALTY OPTIONS, THEREBY REDUCING THE NUMBER OF UNAMBIGUOUS RESULTS. THE FINAL SECTION CONTAINS A BRIEF METHODOLOGICAL DISCUSSION ON MODELING HUMAN BEHAVIOR. MATHEMATICAL EQUATIONS AND REFERENCES ARE INCLUDED. (AUTHOR ABSTRACT MODIFIED--KBL)