Jack and Jill are the only two residents in a neighborhood, and they would like to hire a security guard. The value of a security guard is $50 per month to Jack and $150 per month to Jill. Irrespective of who pays the guard, the guard will protect the entire neighborhood.
a. What is the most a guard can charge per month and still be assured of being hired by at least one of them?
b. Suppose the competitive wage for a security guard is $120 per month. The local government proposes a plan whereby Jack and Jill each pays 50 percent of this monthly fee, and asks them to vote on this plan. Will the plan be voted in? Would economic surplus be higher if the neighborhood had a guard?