Question

6.7 Let each dollar spent on a private good give you 10 units of utility but each dollar spent on a public good give you and your two neighbors 5 units each. If you have a fixed income of $10, how much would you spend on the public good? What is the value of the total purchases at the Nash equilibrium if your neighbors also have $10 each? What level of expenditure on the public good maximizes the total level of utility?

topic is intermediate public finance

Answer 1

(a) I would have spent all the $10 in buying private good. This would result in total utility of 100units This is because I would maximize my utility which happen when I buy no units of public good & only private good. (b) Everyone does the sample because it is a dominant strategy. Hence public goods are not at all purchased & all money is used to buy private good that results in 200 units of utility (c) The level of expenditure on the public good that maximize the total level of utility is $0. Because total utility is maximized at 200 units when all $20 are spent on private good