Suppose that there are two people in a village: Albrecht and Giselle. The streetlights in the...

 

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Suppose that there are two people in a village: Albrecht and Giselle. The streetlights in the village are funded by the residents. One streetlight (s) costs $1. There is only one private good in the economy, money (m). Initially, Albrecht and Giselle have $100 each. Preference of Albrecht is UA(s,m) = log(s) + m and preference of Giselle is given by UG(s,m) = 3 log(s) + m. a. (15 points) What is the optimal number of street lights? b. Compare it with the private market outcome. Namely, how many streetlights will be provided if i. (10 points) Only Albrecht is present? ii. (10 points) Giselle moves to the village after Albrecht? c. (15 points) Find the Lindahl taxes d. (10 points) Discuss whether Albrecht and Giselle would report their true preferences under Lindahl mechanism in part (c). Suppose that there are two people in a village: Albrecht and Giselle. The streetlights in the village are funded by the residents. One streetlight (s) costs $1. There is only one private good in the economy, money (m). Initially, Albrecht and Giselle have $100 each. Preference of Albrecht is UA(s,m) = log(s) + m and preference of Giselle is given by UG(s,m) = 3 log(s) + m. a. (15 points) What is the optimal number of street lights? b. Compare it with the private market outcome. Namely, how many streetlights will be provided if i. (10 points) Only Albrecht is present? ii. (10 points) Giselle moves to the village after Albrecht? c. (15 points) Find the Lindahl taxes d. (10 points) Discuss whether Albrecht and Giselle would report their true preferences under Lindahl mechanism in part (c).

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a ANSWER The optimal number of streetlights is such that the marginal benefit of an additional streetlight equals the marginal cost In this case the marginal cost of an additional streetlight is 1 so ... View the full answer