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Unformatted text preview: Homework 1: Solutions Environmental Economics: ECO 403 Question 1 (12 points). a. The allocation is efficient. We cannot make Luke better off without making Dave worse off. b. The allocation is not efficient. We can give the one remaining frisbee to either Dave or Luke and get a Pareto preferred allocation. c. Dave likes frisbees more than cleats, whereas Luke is indifferent between the two. So if Luke trades a small amount of frisbees for an equal amount of cleats, he is equally well off, but Dave is better off. Dave was willing to give up twice as many cleats to get frisbees, but only had to give up and equal amount. Therefore when Luke trades a small amount of frisbees for an equal amount of cleats, we have a Pareto preferred allocation. Question 2 (20 points). For the table, Ralph saves $5 million by installing the upgrade, but he must pay $1 million for the generator and give $3 million to his customers, so his net benefit is $5- $3- $1 = $1 million. For the control equipment, Ralph pays $7 and gets no benefits, so his net benefit is-$7. A total of 0 . 2+0 . 1 = 0 . 3 million households split the $3 million in savings evenly. That works out to $3 . 3 = $10 per household (both upwind and downwind). Total surplus from upgrading the equipment is 0 . 2 · $10 = $2 million for the downwind households and $1 million for the upwind households. For the pollution control equipment, the downwind households receive $40 of benefits each if Ralph installs the equipment. Total benefits for the downwind households are then $40 · . 2 = $8 million. The upwind households do not care about pollution control and therefore get zero either way. The table is thus: Surplus per person total surplus (Millions) Group Number upgrade not control not upgrade not control not Ralph 1 $1 M-$7 M $1-$7 downwind households 0.2 M $10 $40 $2 $8 upwind households 0.1 M $10 $1 total surplus $4 $1 a. Yes. Looking at the last row, $4 > 0. The surplus from upgrading is greater than the0....
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- Fall '11
- Environmental Economics, Binary relation, Equals sign, The Surplus