2. a) Consider a city of 1 million residents, 60% of whom are willing to pay a maximum of $1 for a new water treatment plant which will improve the clarity and taste of municipal water. The rest of the city is more sensitive to clean water, and with each willing to pay $25 for the project. The water treatment plant would cost $2 million. i) Will the project be funded privately by a market? Explain why or why not. i) It has been proposed that each person be taxed equally to pay for the treatment plant. Is the proposal desirable by the Pareto criterion (unanimity)? Would it pass a majority vote? Does it pass a cost-benefit test (potential Pareto improvement)? b) Consider a small island inhabited by 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 volcano emissions with a Smoke Guzzler . The two upwind residents would each pay $1,000 to be rid of the smoke, while the downwind resident would be willing to pay $15,000. Now consider two plans to pay for the Smoke Guzzler: Plan A call for a head tax of $7,000, Plan B calls for the affected party (the downwind resident) to pay the full $21,000 and the other residents to pay nothing. Compare each plan to the status quo and indicate society's choice using (i) the Pareto criterion (unanimity); (ii) majority rule; (iii) cost-benefit analysis