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PS2_Solutions

# PS2_Solutions - AEM 451/ECON 409 PS#2 Solutions 1 a Plan A...

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AEM 451/ECON 409 PS #2 Solutions 1) a. Plan A: Party Costs Benefits Net Benefits Upwind \$5,000 \$1,000 -\$4,000 Downwind \$5,000 \$14,000 \$9,000 Plan B: Party Costs Benefits Net Benefits Upwind \$0 \$1,000 \$1,000 Downwind \$15,000 \$14,000 -\$1,000 Under plan A, the upwind people lose and the downwind person wins. Under plan B, the upwind people win and the downwind person loses. b. 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. For 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. 2) a. We have to sum individual prices for each quantity to get the aggregate demand curve.

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