Resource Economics 262Problem Set #5, 15 pointsDue: March 25, 2021, by 4:00 pm Two versions of this assignment are posted, a Word version and a pdf version. You may either: (1) type your answers directly on the Word version, convert that to a pdf, and submit the pdf version, or (2) write your answers on a separate document, convert that to a pdf, and submit the pdf. You must submit a pdf copy. Do not simply cut and paste material from my lectures.Please include your name and your student ID number on your submission. Also, name the file you submit{your full name}RESECON262HW#5.pdf. Please make sure that you upload2and2submit your assignment when you are done. Warning for MAC users. Graphs in this assignment may not convert correctly if you download the MSWord version of this document with a program other than Microsoft Office. I believe you can install a free version of Microsoft Office through UMass IT. Alternatively you can2download the pdf version of the assignment, write your answers in a separate document, convert that to pdf and submit that document.2Note: Most of the questions in this assignment come from Unit 6. The last question come from Unit 7. (1) A policy is proposed to reduce emissions of a pollutant that is known to cause a particular illness inhumans. Experts have calculated that the policy will reduce the occurrence of the illness by X cases per year. Suppose that the benefits of the policy are estimated as the reduction in the costs of dealing with the illness (i.e., reductions in the costs of medications, hospital stays, physician services, lost work days, etc.). Give three reasons why this method of estimating the benefits of the policy is likely to underestimate society’s true willingness to pay for the policy. [3 points]This policy has to do with reducing the occurrence of illness by X cases per year. When estimating the benefits of the reduction in costs dealing with this illness there are three reasons why this method may underestimate society’s true willingness to pay for the policy.Reason number 1: These assessments have to do with the costs of the consequences of sickness rather than the willingness to pay to avoid getting sick. Most people would be willing to pay more to avoid getting sick in the first place than what it may cost us if we get sick. Reason number 2: Other people in your family and friend circle would be willing to pay as well to keep you healthy. Reason number 3: Sickness and illness issues usually do not account for the resources people spend to avoid getting these illnesses. For example, these resources include diet, fitness programs, and home regulations of air and water.1(2) Explain how data on housing sales can be used to determine how much homeowners are willing to pay for local environmental quality. [3 points]Housing sales can be used to determine how much homeowners are willing to pay for local environmental quality because people are willing to pay more for houses in less polluted places. This means that their sales show a direct correlation between housing market prices/sales and the areas pollution level. In other words, the extra people are willing to pay tells us something about how they value local environmental quality. (3) Explain the differences between stated preference and revealed preference methods for estimating individuals’ willing to pay for environmental improvements. [3 points]Revealed preference methods involves determining the value that consumers hold for an environmental good by observing their purchase of goods in the market that directly (or indirectly) relate to environmental quality. For example, estimating market compensation in terms of lower housing prices to live in more polluted environments or estimating the values of statistical lives using labor market data to value reductions in mortality risk from environmental policies.Stated preference methods refers to a family of2techniques2which use individual respondents' statements about their2preferences2in a set of transport options to estimate utility functions. In this case, they can find what people are willing to pay for improvements in environmental quality or to avoid environmental degradation.(4) Give three reasons why some are concerned about the reliability of willingness to pay estimates from contingent valuation surveys. [3 points]Experience - CV studies ask people to place values on things that they have no experience about and usually no clue about price. Example: “How a question about how much you would be willing to pay to reduce ozone concentrations from .12 parts per million to .07 parts per million?”Hypothetical nature - CV studies place people in hypothetical situations that makes money less relevant and important as they do not actually have to pay for their decisions. Do people consider budget constraints - Since respondents in CV studies are hypothetical they do not make people pay for anything. This means that most respondents may not take their actual budget constraints into account when conveying their WTP.(5) Define the ecological fallacy and discuss its role in environmental justice research that estimates correlations between household demographics, like income and race, and differences in pollution exposure and harm. [3 points]An ecological fallacy is “when inferences about the nature of individuals are deduced from inference for the group to which those individuals belong.”In environmental justice research the ecological fallacy happens when the correlation between pollution and demographics obtained at a larger unit of analysis (like counties) is applied to smaller units (like towns or neighborhoods). So this can be done with household demographics in the US, income and race in the US, or differences in pollution exposure in the US.