Question

Based in the Kaldor-Hicks Compensation Principle, or Potential Pareto Improvement Criterion, would this policy be a "good idea"?

1. Assume a city of 1,000,000 people is considering cleaning up fine particulate emissions from its aging coal-fired power plant to decrease the ambient pollution level from 100 ppm to 50 ppm. The clean-up will cost $1,000,000,000. It has been proposed that each person be taxed equally to pay for the pollution clean-up. The individual (not aggregate) demand curves for certain proportions of the population are in the table below. Population Subgroup Marginal Willingness to Pay (MWTP) for Pollution Abatement/Reduction (4) Poorest 250,000 MWTP = 2.20 -0.022A Second-poorest 250,000 MWTP = 3.40 -0.034A Second-richest 250,000 MWTP = 100 - 1.000A Richest 250,000 MWTP = 370 -3.700A

Answer 1

Using the MWTP functions given for the 4 groups we can calculate their total willingness as per table below. Since the total willingness is negative (almost -$4.6Billion) it is not a good idea.

	A=	1,00,00,00,000	Cost of clean up
	Constant	Coefficient of A		Constant multiplied by 250,000	Coefficient		Total willingness to pay (constant multiplied by 250000 + coefficient x cost of clean up)
Poorest 250000	2.2	-0.022		5,50,000	-0.022		-2,14,50,000
Second poorest 250000	3.4	-0.034		8,50,000	-0.034		-3,31,50,000
second richest 250000	100	-1		2,50,00,000	-1.000		-97,50,00,000
richest 250000	370	-3.7		9,25,00,000	-3.700		-3,60,75,00,000
Total							-4,63,71,00,000