Answer the question based on the following information for a public good. Pa and Pb are the prices that individuals A and B are willing to pay for the last unit of a public good, rather than do without it. These people are the only two members of society. Q 1 2 3 4 5 Pa $3 2 1 0 0 Pb $5 4 3 2 1 If the marginal cost of producing this good at the optimal quantity is $4, the optimal quantity must be

Refer to the diagrams below in which figures (a) and (b) show demand curves reflecting the prices Alvin and Elmer are willing to pay for a public good, rather than do without it. If the marginal cost of the optimal quantity of this public good is $6, the optimal quantity must be: $12 10 Alvin (a) 4. 2. 4. $12 10 Elmer 6. 4. (b) 2.

a) State the condition for the Pareto optimal provision of a public good. Interpret the condition. B b) Consider agent A with (inverse) demand curve for the public good P₁ = 60 - 2Q and agent B with inverse demand PR = 90 - 5QB, where prices are measured in £ per unit. The marginal cost of producing the public good is £10 per unit. What is the Pareto efficient level of the public good? Explain. Illustrate in a graph. [Hint: Compute the marginal social benefit of the public good by adding up the demand curves vertically, over the p's] c) Describe the Vickrey-Clarke-Groves (VCG) Mechanism, provide examples and discuss problems with the VCG mechanism.

What would be the solution?