Gobbet 10 - Aggregate Demand Public Good Solution

Gobbet 10 - Aggregate Demand Public Good Solution - Gobbet...

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Gobbet # 10: Total Willingness to Pay for Public Goods 1. Say there are 2 consumers, Jack and Jill, who each have a demand for scuba diving trips (a private good). Jack’s demand for scuba diving trips is: Q 1 = 25 – P/2 Jill’s demand for scuba diving trips is: Q 2 = 15 – P/2 What is the aggregate demand for scuba diving trips? 2. Jack and Jill also each have demand for coral reef protection (a public good). Assume the individual demands are the same as those listed above. What is the aggregate willingness to pay (WTP) for coral reef protection? What is the difference between a private and a public good? SOLUTION 1. To start this problem, it is useful to sketch out each individual demand curve. We can see that Jack demands more scuba diving trips at each price than Jill does. $ Q 50 40 30 20 10 10 20 30 40 Jack’s Demand Curve (Q 1 = 25 – P/2) 1
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Notice that the Y (or $) intercepts are different for Jack and Jill. At any price over $50, the market demand will be 0. Neither Jack nor Jill will pay above this price for scuba diving trips. Between $50 and $30, Jack is the only customer in the market. In this range, the aggregate demand is the same as Jack’s individual demand: Q 1 = 25 – P/2. At $30, Jill enters the market. In the range $0 to $30 range, the aggregate demand is the horizontal sum of the two individual demand curves. To obtain this demand curve, treat
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Gobbet 10 - Aggregate Demand Public Good Solution - Gobbet...

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