1. 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 two upwind people would pay $1000 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 $7000. 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 societys choice using (a) the Pareto criterion; (b) majority rule; (c) potential Pareto improvement.