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PS7 - Matt Wong Section 11 Eric Sun Problem Set 7 1...

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Matt Wong Section 11: Eric Sun 11/8/07 Problem Set 7 1. Question 1 a. Lighthouses are a public good because the have the characteristics of nonrivalry in consumption and nonexcludability. This is true because one boat using the lighthouse as a point of reference does not necessarily preclude another boat from using the lighthouse in the same manner (nonexcludability). In addition, the use of the lighthouse by one boat does not mean another ship cannot use it as well (nonrivalry in competition). The government is needed to ensure provision of lighthouses because no firm will provide this service to the public. b. There is no marginal cost for letting an additional ship use the lighthouse. c. In this situation, the socially optimal number of ships that should use the service is found where the demand curve intersects the marginal cost curve, which in this situation is 0. So, the quantity that should be produced is illustrated by the highlighted dot on the attached graph.
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