PS_2_2008__ProblemSet

PS_2_2008__ProblemSet - Environmental Economics AEM 451...

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Environmental Economics AEM 451 / ECON 409 Assignment #2 Distributed Feb. 15, 2008; due by 2:55 p.m. on Tuesday, Feb. 26, 2008 in class. Recall that you may work with others, but that your write-up must be your own. 1. Three different criteria for social choice: Pareto, compensation principle, voting Suppose an island has three residents and a source of air pollution. Two people live upwind of the pollution source and one lives downwind of it. For $15,000, a pollution control device can prevent the pollution from being emitted. The two upwind people would be willing to pay up to $1,000 each to prevent the pollution. The downwind person (the affected party) would be willing to pay up to $14,000. Consider two plans to finance the pollution control device. Plan A calls for a tax of $5,000 per person. Plan B calls for the downwind person to pay $15,000 and the others to pay nothing. a. Under each plan, compared to the status quo of not buying the device, who would be the winners and losers? (In other words, whose individual consumer surplus would increase and whose would decrease?) b. The options are to buy the device or not buy the device. Under each plan, what would be society’s choice using each of the following?
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