Question: suppose a law is passed that prohibits farmers from using...
Suppose a law is passed that prohibits farmers from using certain chemical fertilizers because the excess runs of and contaminates nearby ground water. The expected reduction in illness to water users is $10 million. The farmers experience an $8 million loss from switching to a more expensive fertilizer.
a. Does the introduction of the law represent a Pareto improvement relative to the status quo? Is it a Kaldor-Hicks improvement? Explain.
b. Now suppose the government taxes water users and uses the revenue to fully compensate farmers for their losses. Is the law now a Pareto improvement? Is it a Kaldor-Hicks improvement? Explain.