AEM 451/ECON 409
PS #2 Solutions
Under plan A, the upwind people lose and the downwind person wins.
Under plan B, the
upwind people win and the downwind person loses.
i. Neither plan is Pareto Preferred to the status quo; in Plan A, the upwind people are
worse, and in Plan B, the downwind person is worse off.
ii. Under a majority rules decision, Plan A would be rejected 1-2, since the two upwind
people would vote against it.
Plan B would be accepted 2-1, since the two upwind people
would vote for it.
iii. Either plan could be enacted if we were to utilize the compensation principle.
example, under Plan A, it would be possible for the downwind person to give $4,000 to
each upwind person and still be better off.
Likewise, under Plan B, it would be possible
for each upwind person to give the downwind person $500 and still be better off.
a. We have to sum individual prices for each quantity to get the aggregate demand curve.
b. The efficient amount of air quality can be found where MC=Total MWTP