Question

In: Economics

Adam and Eve live on two sides of the Garden of Eden, a small suburban development....

Adam and Eve live on two sides of the Garden of Eden, a small suburban development. After they move in, an old PCB dump is discovered in between their houses. If X total tons of PCB's are removed from the dump, the two have a true willingness to pay (WTP) to finance a clean-up equal to:

ADAM's WTP = 10 - X

EVE's WTP = 6 - X

a. Adam's WTP is higher than Eve's. Does this necessarily imply that Eve is less concerned about exposure to PCB's than Adam? Why or why not?

b. Draw diagrams illustrating the two individual’s demand curves for clean-up, and the total demand for clean-up in the neighborhood. Derive the function for the total demand. What is the total WTP for the third ton of clean-up?

                                               

c. If cleaning-up costs $12 per ton, is there sufficient WTP in this small community to finance 2 tons? What are two potential reasons why a voluntary clean-up might nevertheless fail?

d. What’s the optimal level of cleanup?

Solutions

Expert Solution

a) ADAM's WTP = 10 - X

EVE's WTP = 6 - X, here X is Total tons of PCB''s removed from dump

Adam's WTP is higer than Eve's. It does not necessarily imply that Eve is less concerned aout exposure to PCB's than Adam. There are two possible reason for this :

  • Disposable Income
  • From point 1, rich factor can be concluded

It can be that Eve does not have the disposable income that Adam does. Adam may be having higher disposable income and hence his WTP is higher. Adam may be just richer that Eve and is able to contribute more for PCB's removal.

b ) For b please refer to the attached image

c) Yes, there is sufficient WTP to finance 2 tons.

Adam's WTP = 10 - X

Eve's WTP = 6 - X

Total WTP = Adam's WTP plus Eve's WTP

This implies : Total WTP = 10 - X + 6 - X

= 16 - 2X

From above image , you can see that at X = 2 , Total combines WTP = 16 - 2 ( 2 )

which is equal to 16 - 4 = 12, which is just enough

Two possible reasons for voluntarily clean-up to fail can be :

  1. Not done properly
  2. Free riding and transaction costs

As mentioned above it can fail due to lack of of volunteers, if cleaning is not properly, due to lack of information or lack of training, or might be due to wrong calculations of money aspect.


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