The town of Musicville has two residents: Bach and Mozart. The town currently fund sits free outdoor concert series solely from the individual contributions of these residents. Each of the two residents has a utility function over private goods (X) and total concerts (C) of the form U = 3 × log(X) + log(C). The total number of concerts given, C, is the sum of the number paid for by each of the two persons: C = CB+ CM. Bach and Mozart both have income of 70, and the price of both the private good and a concert is 1. Thus, they are limited to providing between 0 and 70 concerts.
a. How many concerts are given if the government does not intervene?
b. Suppose the government is not happy with the private equilibrium and decides to provide 10 concerts in addition to what Bach and Mozart may choose to provide on their own. It taxes Bach and Mozart equally to pay for the new concerts. What is the new total number of concerts? How does your answer compare to your answer to 14a? Have we achieved the social optimum? Why or why not?
c. Suppose that instead an anonymous benefactor pays for 10 concerts. What is the new total number of concerts? Is this the same level of provision as in b? Why or why not?

  • CreatedApril 25, 2015
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