Suppose there are three mutually exclusive groups in a particular state: timber company shareholders, environmentalists, and neutral parties. The numbers of each are as follows:
|
Shareholders
|
100
|
|
Environmentalists
|
500
|
|
Neutral parties
|
1,500
|
The total profit from logging is $8,000, which is evenly divided among shareholders. Environmentalists wish to stop all logging and are willing to pay $25 each to do so. Neutral parties are uninterested in this debate.
(a) Is a law banning logging Pareto optimal? Is it Kaldor-Hicks efficient?
(b) Suppose that loggers would be fully compensated if logging were prohibited, but this would require raising tax revenue of $8,000 and paying it to shareholders. For each of the following scenarios, state whether a law banning logging, coupled with compensation, is Pareto optimal, and whether it is Kaldor-Hicks efficient:
(i) The tax is assessed equally on both environmentalists and neutral parties;
(ii) The tax is assessed only on environmentalists.