Estimate the optimal level of provision, Macroeconomics

There are a lot of mosquitoes in the island of Liholiho. Only two people live in this island, Robinson Crusoe and Man Friday. Their respective demand curves for mosquito control are given by Pc = 120 - 2Qc and Pf = 260 - 4Qf, where c stands for Crusoe, f stands for Friday, and Q and P are quantity and price of mosquito control. Suppose that mosquito control is a public good.

(a) What is the optimal level of provision of this good if it can be produced at a constant marginal cost of $80 per unit?

(b) What would it cost the Government of Liholiho to provide the optimal amount of mosquito control?

(c) How should the tax bill be allocated between the two individuals if they are to share it in proportion to the total benefits from mosquito control received by each individual?

(d) If mosquito control were left to the private market, how much would be provided? Does your answer depend on what each person assumes the other would do? Explain.

 

Posted Date: 3/19/2013 5:57:32 AM | Location : United States







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