Question

2. Suppose that two people live in Traverse City, Michigan – Bert and Ernie. In the winter, the snow is so heavy and frequent that the city is considering adding heating elements under the sidewalk to melt the snow on the sidewalks in order to make them passable. This affects all of the residents. The marginal cost of heating one block of sidewalk is $40. (MC = 40.) Use the following demand curves in your answer as needed, suppose that Q is blocks of sidewalk:

            Bert’s: P_B = 30 – Q

            Ernie’s: P_E = 22 – 2Q

a) Draw the market demand for the public good. Denote the area where both consumers are willing to pay for additional heated sidewalks “A” and the area where only one of them is willing to pay “B.” Label all axes, intercepts, kink points, and slopes.

b) What is the socially optimal quantity of heated sidewalks?

c) Explain the free rider problem

d) Explain how the free rider problem can undermine Pareto Efficiency in the market for public goods. Your answer should refer to the Samuelson Condition.

Answer 1

Answer:

A)

We can see the market demand cure for the public good above. Here the Quantity of the good is denoted in the X axis, and the price of the good is denoted in the Y-axis. The curves AB and CD denotes the price and Quantity of Bert’s and Ernie’s consumption. The Curve DE denotes the market demand for public good. It can be seen that in a public good, the demand for the good is very high an is not restrictive by any the factor.