Answer

Suppose the punishment has utility p. Then the utility table becomes:

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So if p has a utility value lower than

2, then it is in my interest not to steal, and similarly for my neighbor. If we both act in our own self-interest, given these punishments, we will each get a utility of 0.

If only 25% of thieves are caught, then the expected utility of punishment p is only p/4. So to deter stealing among self-interested people, the punishment must have a utility value lower than 8.