Question: The defense services provided by submarines are a public good

The defense services provided by submarines are a public good. Suppose that the equation relating the marginal benefit Ted derives from the quantity of submarines produced (Q) is MB = 600 – 10Q. The equation relating the marginal benefit Jane derives from submarines is MB = 400 – 10Q. The marginal cost of producing each submarine is a constant $ 400.
a. If Ted and Jane are the only two individuals who benefit from the defense services provided by submarines, what is the efficient output of submarines?
b. Without any coordination between Ted and Jane and/ or government intervention, what will be the output of submarines? Explain your answer. What will be the size of any resulting inefficiency?
c. Suggest a taxing scheme to ensure the attainment of efficiency in the provision of submarines.
d. Suppose that the defense services afforded by submarines are still nonrival in consumption but that the cost of excluding a demander is zero. If submarines are produced by a monopolist practicing third-degree price discrimination (that is, a producer that charges different prices to different demanders), what will be the profit-maximizing output and price that the monopolist will charge Ted and Jane? How does your answer compare to that in part a?

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  • CreatedNovember 14, 2014
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