QUESTION 1

You are undertaking a contingent valuation study to determine the social damages from pollution at a beach, which is caused by a local factory.

1. Identify at least two groups of people that you would like to target when undertaking the survey. Explain why this is a normative decision.

2. When designing your survey, you will need to specify a market scenario. Give an example of such a scenario, and explain why your scenario is consistent with best practice.

After completing your study, you identify that there are two groups of people, with a different willingness to pay (WTP) to remove the pollution. Group 1 has 50 members, with a WTP of $30 each. Group 2 has 500 members, with a WTP of $6 each. Suppose that it costs a total of $4,400 to clean up the pollution. Assume that these costs would be paid for by a head tax (where everyone pays the same amount).

3. Is there a pareto improvement? Is there a potential pareto improvement? Explain.

4. What is the efficient outcome? Identify the normative assumption behind your answer.