Question

Question 3 Tries remaining: Marked out of 1.00 Suppose the town of Hanesburg, population 200, is considering installing a tornado warning system that would sound a warning signal audible from any part of Hanesburg. The cost of the system is $20,000. Each resident's value for such a system is $200. • What is the aggregate WTP for the tornado warning system? $ P Flag question • Is it socially optimal for this service to be provided? Suppose a company Tornadoes Unlimited decided to install the tornado warning system in Hanesburg and charge the residents of the town for its use. What would be the likely outcome? Select the best option from the list below: 1. The company would earn a reasonable profit since the value of the system to the residents exceeds the cost. 2. Since the service is non-rival in consumption, town

Answer 1

1. The aggregate willingness is $40000. Willingness to pay is how much a consumer is willing to pay for a particular good or service. In our case, each individual is willing to pay $200. Aggregate willingness to pay is the sum of all 'willingnesses'. In our case, since the population is 200, the aggregate willingness become 200*200=40000.

2. Yes it is socially optimal. A socially optimal situation is where all consumers receive same benefit for same cost. In our case, the whole town will be able to hear the warning while paying the same amount. Hence, it is socially optimal.

3. The answer is option 3- it will be a money losing project. This is because of the 'free rider problem'. This problem arises when there is 'non-excludable' product- as in our case. A non excludable product is where one can't stop non paying customers from using it. Since the system will be heard by all residents of the town, no matter if they paid for it or not, it is a non excludable service. This will result in the free rider problem where people will stop paying since they can use the service for free anyway and can't be stopped from using it. This will result in this becoming a money losing project.