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Question: suppose a law is passed that prohibits farmers from using...

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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.

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