{[ promptMessage ]}

Bookmark it

{[ promptMessage ]}

HW_3 - EEP101/ECON125 HW3 Spring 2007 1.Public Good The...

This preview shows pages 1–3. Sign up to view the full content.

EEP101/ECON125 HW3 Spring 2007 1.Public Good The villagers in an isolated village are now contemplating on investing in a paved road to connect to the outside world. There are three types of villages. A high type consumers’ total utility is given by H x θ , and a low type consumer’s total utility is L x , where x is the quality of the paved road, and 0 H L are constants representing consumers’ preference for quality. The third type of consumers, called “hikers”, does not derive any utility from the paved road at all and there utility is zero. There are H high type villagers, L low type villagers and N type of hikers living in the village. The marginal cost of constructing a paved road with quality x is given by cx, where c>0 is a constant. (a) Find the social optimal quality of the paved road in terms of the parameters given in the question. (b) Suppose that the village manager drafts up a proposition to levy every villager an equal lump-sum fee to cover for the total cost of providing the social optimal level quality of paved road. Please compute the aggregated consumer surplus of all the villagers as well as the surpluses for each type of villagers. If every villager can vote on this proposition and suppose everybody only cares about his own benefit, and we know that 1 H L N H < + , what is the condition for this proposition to pass? (c) The proposition in (b) fail to pass in referendum. Can you suggest another scheme for public provision of the social optimal quality of road assuming you know the types of the villagers? What are the consumer surpluses for each type of consumers? (d) Another proposition of the village manager is to contract this construction project to a private firm. The firm will charge a entry fee for anyone who uses the road. Suppose the firm knows the types of the villagers and it will maximize profit, then what entry fees will he charge? And what quality will he provide? What are the firm’s profit and each type’s consumer surpluses in this case? What entry-fees will the firm charge if he cannot tell the high type apart from the low type? What are his profit and each type’s surpluses then? 2. Contingent Valuation Please read the following report about a research done by economists Patricia Champ and Richard Bishop carefully and answer the questions at the end of the report. Two problems have discouraged widespread use of voluntary donations in contingent valuation studies. First, donations are not fully demand revealing as they allow for the possibility of free riding. For example, people may expect others to donate, and may not actually donate when they have to. Second, some studies (Navrud 1992, Champ et al 1997, Brown et al 1996) have consistently shown that contingent donations tend to

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
overestimate actual donations. In literature, such tendency is often referred as “hypothetical bias”. This is a fundamental concern of any contingent valuation method rightnow. To identify the nature and magnitude of such bias, this study uses a survey done in
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

Page1 / 6

HW_3 - EEP101/ECON125 HW3 Spring 2007 1.Public Good The...

This preview shows document pages 1 - 3. Sign up to view the full document.

View Full Document
Ask a homework question - tutors are online