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 three 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 $5,000. 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.
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 three 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 $5,000. 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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