Question

Jack and Jill are the only two residents in a neighborhood, and they would like to hire a security guard. The value of a security guard is $100 per month to Jack and $150 per month to Jill. Irrespective of who pays the guard, the guard willl protect the entire neighborhood and charge $120 per month for the service.Suppose Jack earns $3,500 per month and Jill earns $8,500 per month. a. With a proportional tax of 1 percent on income, how much would Jack and Jill pay, and would it be enough to pay for the security guard? Jack would pay $ 40 Jill would pay $ 80 This tax would |be enough to pay for the security guard. b. Suppose instead that Jack proposes a payment scheme under which Jack and Jill would each receive the same net benefit from hiring the guard. How much would Jack and Jill pay now? Jack would pay $ 40 Jill would pay $ 80 Would both Jack and Jill vote for this scheme? Yes. Both will vote for it. No. Jill will not vote for it. No. Jack will not vote for it. c. What is the practical problem that prevents ideas like the one in part b from working in real-life situations? People with a low perceived benefit will pay a smaller share of the total cost, making these people feel inferior to those who pay more Uneven distributions of wealth will mean that some of the involved parties are willing to pay more, which is unfair to those with higher incomes The socially efficient outcome is always for all involved parties to pay the exact same share of the total cost. Each party involved has incentive to understate his or her benefit in order to pay less of the total cost.

Answer 1

Solution: Given Jack and gll are a residents in a neighborhood. frack) value of security guard = $100 per month (Jill) = $150 per month Gaurd charges'= 8120 per month Jack earns = 83500 per month till earns = 88500 per month @ proportional tax of 14.on income., Jack and Jill will pay and enough to pay secesity guard : → H. of 3500 = 1835) 18 paid by Jack H of 8500 =(885 is paid by Jill hence total tax collected =835+$85 = 8120 would be enough and this the only amount required to have a gourd. Sefficient to provide guard."

Jack 6 If jack proposes a payment scheme under which and gill would receive same net benefit then - net benefit to jack after paying x= 100-X Net benefit to fill after paying y = 150-y net benefit of gould should be eawal, so 200-X = 150-Y Y-X = 150-100 Y- x=50 and given x+y=120. ;';. V-X=50 x+y=120 + 2y = 170 y = 17012. = 851 X = 120-y = 120-85 = (357 Hence Yes, both will vote for guard. option (e)" is correct

© Practical problem that prevents ideas like the one in part b from working in real life situations : - The practical issue here is that people will not normally tell their reservation Price because of they tell their actual defervation prices, expectation for them to pay higher increases. So, they will also tell referration price which is lower than the actual and then it is very difficult to arrive at a für distribution.. option (A) is correct (a): people with a low perceived benefit will pay a smalley share of the total cost, making these people feel inferior to those who pay more O.