Question: This question is about clarke tax as below QUESTION 5 Consider a collective decision by three individuals to produce, or not, one public good that
This question is about clarke tax as below

QUESTION 5 Consider a collective decision by three individuals to produce, or not, one public good that costs $150. Suppose that if the public good is produced, the cost is equally shared among the three individuals, namely $50 each. Assume that the gross benefits from the public good differ among individuals and are respectively $20, $40, and $100 for individuals 1, 2, and 3. Each individual is asked to announce his own net benefit for the public good, and the public good is produced only if the sum of the reported net benefits is weakly positive. (a) Show that the Clarke tax induces truth-telling as a dominant strategy if each individual reports independently his own benefit. (3 points) (b) Show that the resulting provision of public good in part (a) is optimal. (1 point) (c) What would be the provision of public good if the decision were taken by a majority vote, assuming that the cost is equally shared in the event of public good provision? Compare your answer with part (a) and interpret the difference. (2 points) (d) Show that the Clarke tax is not robust to collusion in the sense that two individuals could be better off by jointly misreporting their benefit from the public good. (4 points)
Step by Step Solution
There are 3 Steps involved in it
Get step-by-step solutions from verified subject matter experts
