Again, he is considering two options for using the land. First, he could leave it as forest forever, an outcome which provides him $10 million worth of benefits, because he likes the forest. His other option is to cut down the entire forest. That option he values at $11 million because cutting the trees will cost $5 million and yield $15 million worth of lumber, plus the treeless land will be worth $1 million. Regarding wealth effects, we will continue to assume that Mr . Oak's valuations of these outcomes do not depend on wealth effects – this is what we implicitly assumed in Question 1 . We will, however, allow wealth effects to matter for the other people who value the forest. Suppose there are 10, 000 people who live, hunt, and gather food in the forest. These people want to prevent the forest from being cut, and they have asked the government to prevent Mr. Oak from cutting it down. The government has decided that if it is efficient to keep the forest as is, Mr. Oak will be required to keep it as it is . Your job is to advise the government. The government has determined the following facts about the people living in the forest: i) They are rational and completely honest. ii) When asked about the maximum amount they would be willing to pay to keep the forest, they answer $50 per person. iii) When asked about how much they would have to be paid, if the forest were cut, in order to make them as happy as they would be if the forest were kept, they answer $5, 000 per person.
Would the outcome be efficient if the government passed a law saying that Mr . Oak must keep the forest as it is ? If so, why? If not, provide an example of a Pareto improvement (i . e . , an alternative outcome that leaves everyone better off) .