The following table shows all the marginal benefits for each voter in a small town whose town council is considering a new swimming pool with capacity for at least three citizens. The cost of the pool would be $18 per week and would not depend on the number of people who actually used it.
Voter Marginal benefit ($/week)
A……………………… 12
B……………………… 5
C……………………… 2
a. If the pool must be financed by a weekly head tax levied on all voters, will the pool be approved by majority vote? Is this outcome socially efficient? Explain.
b. The town council instead decides to auction a franchise off to a private monopoly to build and maintain the pool. If it cannot find such a firm willing to operate the pool, then the pool project will be scrapped. If all such monopolies are constrained by law to charge a single price to users, will the franchise be sold, and if so, how much will it sell for? Is this outcome socially efficient? Explain.
c. Suppose now that all such monopolies can perfectly price-discriminate. Will the franchise be sold, and if so, how much will it sell for? Is this outcome socially efficient? Explain.
d. The town council decides that, rather than auction off the franchise, it will give it away to the firm that spends the most money lobbying council members. If there are four identical firms in the bidding and they cannot collude, what will happen?