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Unformatted text preview: Environmental Economics (AEM 4510/ECON 4090) Solutions to Assignment #1 1. Plan A Plan B a) Status Quo Status Quo b) Status Quo Smoke Guzzler c) Status Quo Status Quo (a) The Pareto criterion requires that an action only be undertaken when it makes at least one person better off, while making no one else worse off. Since the WTP for the upwind residents is $1,000, a head tax of $7,000 makes them worse off, therefore Plan A would fail the pareto criterion. Plan B would also fail because it requires the downwind resident to pay $21,000, but her WTP is only $15,000. (b) Plan A would fail to earn a majority vote, for the same reasons as in part (a), ie, the upwind residents WTP is less than what the plan requires them to pay. Plan B however, would achieve a 2 of 3 majority. (c) A good starting point is to recognize that the sum of WTP would not finance the smoke guzzler: if each resident was charged exactly their maximum WTP, $17,000 could be raised, while the project costs $21,000. Under these circumstances, no financing scheme exists, even with compensation, the would earn unanimous support. For Plan A, the upwind residents would have to be compensated $6,000 each to be in favor of the plan, but the sum of the downwind residents tax and this necessary compensation ($7 , 000+$12 , 000 = $19 , 000) is greater that her WTP ($15,000). Similarly, the upwind residents could compensate the downwind resident $1,000 each, but this is not enough to make up the difference between her WTP...
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- Spring '08