Shared Driveway Problem (Public Economics)

Problem V. Shared Driveway (35 points) Recall the textbook example where two neigh- bors share a driveway. Suppose each person gets utility on the private consumption good, c, and the driveway, D = dj + d2, such that wi(c, D) = In(c) + %: In(D). Price of snowplow- ing/repairing services is p in terms of the consumption good. Each person has income I;. Let 6, = pdi/ I; denote the income share of driveway expenditures for person i. First, assume that 71 = 2 = y and /1 = 12 = 1. 2 1. Find the social optimal income share of driveway services, 6. (5pts) 2. Find the private optimal income share of driveway services, 6*. (5 pts) 3. Compare &* and 6. Explain intuitively why they are different. (5 pts)