e360_apape_socialwelfareexample

e360_apape_socialwelfareexample - Who buys Who gets what A...

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e360_apape_socialwelfareexample.txt 2008-12-02 - 1/1 - date Tue Dec 2 18:10:15 EST 2008 * Andreas Pape, Econ 360 * Public Good Example Good: a radio station; it either exists or not (0 or 1 radio stations.) A values the radio station at $100/month B values the radio station at $150/month C values the radio station at $50/month The radio station costs $180/month to run. 1. Is it a good idea to have this radio station? meaning: is 1 the optimal quantity? Answer: Yes Total benefit of radio = 100 + 150 + 50 = $300/month Total cost of radio = $180/month Total social surplus from radio = 300 - 180 = $120/month Since the surplus is positive (versus the alternative of $0) it is a good idea. 2. "Private outcome" Q: Suppose radio posts a price of $180 to cover costs. Who buys? Who gets what? A: No one. Q: Suppose radio posts a price of $150 (losing $30/month). Who buys? Who gets what? A: A buys. A, B, and C each get 1 radio station. Q: Suppose radio posts a price of $100.
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Unformatted text preview: Who buys? Who gets what? A: Only A buys. A, B, C each get 1 radio station. Q: Is there any price that the radio station can post, such that they can afford to run? A: No. 3. "Socially optimal outcome:" NPR runs, and A, B, and C pay some amount of money less than their WTP. Q: How much would they each pay? How much "should" each of them pay? A: No perfect answer for this. Answer 1: split costs: A, B, C each pay $60. Problem: C would not be willing to pay $60. Answer 2: split surplus: A pays $60 (100 - 60 = $40 surplus), B pays $110 (150 - 110 = $40 surplus), C pays $10 ($50 - $10 = $40 surplus). Which is more "fair"? Hard to say. Q: Should they put a tax on another good to pay for the radio station? A: Since the surplus from the radio station is $120/month, so long as the deadweight loss of the proposed tax is less than $120, that would be a good idea. (Although not necessarily 'fair.')...
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