Question

Thank you in advance!

2. The table shows the monthly rent of a two bedroom flat and the level of air pollution. Air pollution ug/m3 20 AAD o0 80 100 Rent Euro 400 380 350 310 260 a) Assume it is possible to interpret the value of the rent as the demand for improved air quality. Calculate the marginal willingness to pay for reducing air pollution. Show the marginal willingness to pay in a diagram and label your graph. b) Assume that a project is under discussion which would reduce air pollution from 60 to 40 ug/m3. There are 5,000 households in this town. The annual cost of the project is 200,000 Euro. Would it be reasonable to support this project?

Answer 1

We rewrite the following values in the table in descending order

Let MWP denotes the marginal willingness to pay of the people. The MWP is the additional rent that the people are ready to pay to reduce air pollution by 20mg/m³ . so for e.g to reduce air pollution for 80 to 60, people are ready to pay 350 instead of 310 i.e an additional amount of 40 euro. So MWP in this case is 40. The following table calculates the MWP in a similar manner.

The MWP curve is upward sloping as people are willing to pay more when pollution level is high as compared to the case when pollution level is low.

b.) From the table we can see that people are wiling to pay 30 euros more to reduce pollution from 60 to 40. and since there 5000 people, the total MWP is equal to 5000*30 = 1,50,000. given the cost of this project is 2,00,000 which is clearly greater than what the people are willing to pay. Therefore it would not be reasonable to support this project.