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PS 02 - PROBLEM SET 2 Economics 335(Materials from Reading...

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PROBLEM SET 2 - Economics 335 – (Materials from Reading List Part IIA and IIB ) J. Wissink
Cornell University 1. Answer True, False, or Uncertain. Explain. a) Public goods must be financed and produced by the government. b) If the preferences of a community are not single-peak
ed, then majority voting will cycle and never produce a "winning" alternative. c) In economies with public goods there is always only one unique level of public good associated with Pareto efficiency. d) Since public park
s are owned by the government, they belong to all the people and therefore everyone should be allowed to enjoy them free of charge. e) Selling bridges to private profit maximizing operators who are allowed to erect toll booths and charge crossing fees would completely solve the public good problem with respect to bridge crossing allocations. 2. Suppose there are only 3 citizens residing in Smalltown, NY. Each citizen's marginal- willingness-to-pay (mwtp) for different amounts of defense is summarized below. $mwtp-Abe Abe $mwtp-Betty Betty $mwtp-Charlie Charlie $.50 10 tons $.50 11 tons $.50 9 tons $1.00 9 $1.00 10 $1.00 8 $2.00 8 $2.00 9 $2.00 7 $3.00 7 $3.00 8 $3.00 6 $4.00 6 $4.00 7 $4.00 5 $5.00 5 $5.00 6 $5.00 4 $6.00 4 $6.00 5 $6.00 3 $7.00 3 $7.00 4 $7.00 2 $8.00 2 $8.00 3 $8.00 1 $9.00 1 $9.00 2 $9.00 0 a) If the social marginal cost of defense is constant and equal to $12 and there are no fixed costs, what is the Pareto efficient level of national defense? (Remember, defense is considered to be a pure public good.) b) What is the total cost of the efficient public good production? If the government chooses to charge each citizen his/her mwtp for the amount of public good provided (the Lindahl prices) what price per unit would each citizen pay? What total amount would each citizen pay? Is the government's budget balanced? c) If the government decided to split the cost of the efficient level of the public good
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evenly, what price per unit would each citizen pay? What total amount would each citizen pay? d) If the government decided to charge each individual the per-capita marginal cost per unit (i.e., $4 per unit) and then used majority rule to determine the outcome, what level of public good would be produced? Is this level efficient? Explain why or why not using an
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