Question

1. Consider an economy with two consumers, Ben and Joe. There is public good in this economy in a form of tornado sirens. Ben’s demand for tornado sirens is given by P = 10 − Q, and Joe’s demand for tornado sirens is P = 8 − 2Q. Marginal cost for providing tornado sirens in the markets is constant, MC = 9.

(a) Are tornado sirens a public good? Explain your answer.

(b) On the graph below, draw the marginal cost MC, as well as Ben’ and Joe’s marginal benefits. Label Ben’s MBB and Joe’s MBJ . Make sure to label all intercepts. Then derive the social marginal benefit from sirens, and draw it on the graph. Label it SMB.

(c) What is the efficient quantity of sirens?

(d) Suppose Ben and Joe must pay equal contributions for sirens. Will this lead to the efficient quantity? Explain.

(e) Suppose now that each of them should pay a proportion x of the total benefit he receives from the sirens.

i. Find Ben’s total benefit and Joe’s total benefit from the efficient quantity you found in part (c).

ii. What is the minimum proportion x necessary to finance the efficient quantity?

iii. Do you find the solution from part (1(e)ii) realistic? Explain

Answer 1

Answer:- ④ ② we know that a public good stuetelt must be non-rival and non-excludable.it yes, Tornado Sirens are public goods. → If one person uses it, other people's we of - this good is not affected (non-rival). - Everyone in the area will be able to hear - the sisen, regardless of whether they paid 1. this good. (non-excludable). Therefore, it is a public good. for

(6) The man marko demand curve can be derived by Vertical summation of the individual demand curve. p f 18 < lol palo-Q Me I mobben MB 1 Byut 10 Nee SMB 34 Ben Joe 3 4 lo 04 efficient quantity of sirens! smc= SMB 9 = 18- 30 10*= 3 7 As me intersects the o smo curve in the upen. Therefore, there will be a sirens provided efficiently. Price must be paid =9 If both will pay equal contribution (4.5) each then this will head efficient quantity, But in neal life this is not possible, of everyone wants to be a free rider.