UT ECO 321 - Problem Set 3_Ch 9 to 12_ Solution (8 pages)

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Problem Set 3_Ch 9 to 12_ Solution



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Problem Set 3_Ch 9 to 12_ Solution

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Pages:
8
School:
University of Texas at Austin
Course:
Eco 321 - Public Economics

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Economics 321 Public Economics Prof Marika Cabral TA Katherine Keisler Fall 2017 UT Austin Problem Set 3 Solution due Mon October 23 1 Ch 9 In a recent study Americans stated that they were willing to pay 70 billion to protect all endangered species and also stated that they were willing to pay 15 billion to protect a single species Which problem with Lindahl pricing does this demonstrate Explain This illustrates the preference knowledge problem Lindahl pricing requires an accurate measure of each individual s marginal willingness to pay but people often do not have a good idea of their own marginal willingness to pay for things that are not ordinarily bought or sold in the market Endangered species protection is an abstract concept so it is unlikely that people had thought about their willingness to pay for it before being surveyed At 15 billion per species all endangered species could not be protected for 70 billion It appears that the respondents either overstated their willingness to pay to preserve one species or understated their willingness to pay to preserve all endangered species 2 Ch 9 Alfie Bill and Coco each value police protection differently Alfie s demand for the public good is Q 60 5P Bill s demand is Q 80 4P and Coco s demand is Q 100 10P If the marginal cost of providing police protection is 12 5 what is the socially optimal level of police provision Under Lindahl pricing what share of the tax burden would each of the three people pay To answer these questions first rewrite each demand so that P is expressed as a function of Q Alfie PA 12 0 2Q Bill PB 20 0 25Q Coco PC 10 0 1Q Adding each person s willingness to pay yields PA PB PC 42 0 55Q The left hand side gives the marginal social benefit of providing the Qth unit of the good Setting this marginal benefit equal to the marginal cost gives the socially optimum level of provision 42 0 55Q 12 5 or Q 53 64 When Q 53 64 Alfie s marginal benefit is 12 0 2 53 64 1 272 Similarly Bill s marginal benefit is 20 0 25 53 64 6 59 and Coco s is 10 0 1 53 64 4 636 Hence Alfie s share of the tax burden under Lindahl pricing is 1 272 12 5 10 18 and Bill and Coco s shares are approximately 52 72 and 37 09 respectively 3 Ch 9 Carrboro has three equal sized groups of people 1 type A people consistently prefer more police protection to less 2 type B people prefer high levels of police protection to low levels and they prefer low levels to medium levels 3 type C people prefer medium levels to low levels which they in turn prefer by a modest amount to high levels a Which types of people have single peaked preferences Which have multipeaked preferences Types A and C



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