Consider a municipality with three types of households: A, B, and C. The municipality provides z units of the public good, z. The demand for the public good differs across household types: DA= 50 − z , DB= 30 − 3/5z, DC= 20 − 2/5z. These functions give each type’s willingness-to-pay (WTP) for a level of z. a) Find the social benefit curve, DΣ, if there is one household of each type in the municipality. Graph each demand curve and the social benefit curve. b) If the marginal cost of the public good is 25 per unit, find the socially optimal level of the public good, z∗. c) If the public good is financed by a per-household tax, compare the level of public good provision with the majority voting to the socially optimal level.
Consider a municipality with three types of households: A, B, and C. The municipality provides z units of the public good, z. The demand for the public good differs across household types:
DA= 50 − z , DB= 30 − 3/5z, DC= 20 − 2/5z.
These functions give each type’s willingness-to-pay (WTP) for a level of z.
a) Find the social benefit curve, DΣ, if there is one household of each type in the municipality. Graph each demand curve and the social benefit curve.
b) If the marginal cost of the public good is 25 per unit, find the socially optimal level of the public good, z∗.
c) If the public good is financed by a per-household tax, compare the level of public good provision with the majority voting to the socially optimal level.
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