In the preceding problem, drop the assumption that everyone is identical. Some hate pollution more than others do. The one person in Grimyville who hates pollution the most considers the cost of breathing it to be $100 per month.
a. Explain why the demand curve for Grimyville apartments is downward sloping. At what price does it cross the supply curve? Draw the supply and demand curves for Grimyville apartments and show the consumers' and producers' surpluses.
b. Suppose that the air in Grimyville is brought up to Cleantown standards.
Show the effects of this change on your graph. Show the increase in social gain. Who benefits from the clean air? Who loses from it?