Public Economics
Economics 205
Professor Adler Mandelbaum
Problem Set #3
Due Tuesday November 3
Make sure to explain your answers, show your work, and, when applicable, draw graphs.
1.
Suppose there are only 2 fishermen, Zack and Jacob, who fish along the coast. They would each benefit if
a light house were built along the coast where they fish. The Marginal Cost of Building the light house is
$100. The Marginal Benefit to Zach is 90 . The Marginal Benefit to Jacob is 40 . (Q is the number
of light houses.)
a. Explain why we might not expect to find the efficient number of lighthouses along the coast.
b. What is the efficient number of light houses?
2. Steel production generates pollution which is harming the health of those who live near the
steel mill. With each unit of steel produced the damages to health are $6. In other words, the
Marginal Damage=6Q. The MB of steel production is given by: = 80 0.4
The MC of steel production is given by: = 10 + 0.6.
a. What level of steel does the market provide?
b. What is the efficient level of steel production?
c. If uncorrected, what is the deadweight loss?
d. If you were to use a tax to achieve the optimal level of production, how would you
construct the tax? What is this type of tax known as?
e. Describe how you could use quantity regulation to solve this externality problem.
3.
A town is installing streetlights (S), a public good. Each streetlight has a marginal cost of $5300. There are
two types of people in the town, night-owls and early risers. There are 40 night-owls. Each night-owl gets
the following marginal benefit from streetlights:
= 60 3
Each early riser gets the following marginal benefit from streetlights:
= 40
The town economist has correctly calculated the efficient level of S, and has correctly determined that the Lindahl price for night-owls should be $45.
a.
b.
c.
4.
What is the efficient number of streetlights?
What is the Lindahl price for an early riser?
How many early risers are there in the town?
Amelia and Brad are the only two residents in their town. They consume a public good, G, and a private
good, X, and each has =
a.
b.
c.
4
. Each person has an income of $840.
3
What is the efficient level of the public good?
What is the Nash equilibrium level of the public good?
The government is concerned about underprovision of the public good and decides to provide
378 units of G. It funds this by collecting a tax of 189 from each person. In this situation, what is
Amelias best response function?
d.
e.
f.
g.
5.
How much G will be provided in part c?
The government is still unhappy with the level of public good provision. It decides to continue
providing 378 units of G, but to require Amelia to pay for all 378 units. In this situation, what is
Amelias best response function?
What is Brads best response function in part e?
How much G will be provided in part e?
Pleasantville has two identical residents. Each has the same MRS between public good, G, and private
good, X, MRS =
a.
b.
6.
4
.
3
Each resident has the same income. The efficient level of Public Good is 900.
What is each individuals income?
If a third person moves into Pleasantville, what is the new efficient level of Public good?
Consider a community with N identical individuals, each with =
between the public good, G, and
private good, X. Each individuals income is $25,000. The efficient level of public good is G = 175, 000.
How many individuals live in this community?
7.
Suppose there are N identical residents in a town. Each resident has income of $10,000 and each resident
has the same MRS between public good, G, and private good, X, =
a.
b.
c.
.
3
What is the efficient level of the Public Good, G?
What is the Nash Equilibrium Level of the Public Good?
At what number of people is the ratio of the Nash equilibrium level of public good to the efficient
1
level of public good equal to ?
d.
As this community grows larger, is under-provision more or less of a problem?
