Question

4. Suppose we have a small inhabited island with three residents and a volcano that generates air pollution. Two people live upwind of the volcano and one person lives downwind. For $21,000 we can clean up the volcano with a patented "smoke guzzler." The two upwind people wold pay $1,000 each to get rid of the smoke whereas the downwind person would be willing to pay $15,000. Consider two plans to finance the "smoke guzzler." Plan A calls for a head-tax of $7,000. Plan B calls for the affected party (the downwind person) to pay $21,000 and everyone else nothing. Compare each plan to the status quo and indicate society's choice using (a) the Pareto criterion (b) majority rule, and (c) potential Pareto improvement.

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Answer 1

"If we perform pareto criterion, then there will be no plan which Would satisfy these condition and nether would survive the unanimous vote. In case of voting plan A Would be defeated on two one vote on the basis of majority (both upwind parties would favor NO) While plan B will be successful with two to one majority vote which be favored by both upwind parties favoring YES. As Winner surplus ($ 15000 - $ 7000 = $ 8000) is not sufficie4nt to compensate to the loser surplus [2($ 1000 - $ 70000 = -$ 12000], thus plan A is not a potential pareto improvement plan B is not a potential pareto improvement since ""Winner surplus"" does not out Weigh ""loser cost"""