2350pqset_6an - ECON2350 V BARDIS AN E T P A TI E ET 1 See...

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Unformatted text preview: ECON2350 - V. BARDIS AN E T P A TI E ET 1. See notes. 2. See notes. 3. a. Each person will plant the amount such that his MWTP or Marginal Benefit (MB) is equal to the price. Therefore, the ‘market outcome’ is 11—qa=1 :> qam=10 G—QbZl => gbm=5 b. In the market outcome, each person disregards the benefit his plants have on the other. Therefore we expect that each buys less that the ‘socially optimal’ amount and so the total number of plants will be less than the efficient one. Note that the plants in A’s garden are ‘consumed’ by both A and B so they are a ‘public good’. The same is true for the plants in B’s garden. 0. Let M S B A be society’s marginal benefit (or MTWP) for plants in A’s garden. It follows from the above that M SB A is equal to the sum of the individual MB’s. From the table: MSBA = (11 —qa)+ (1) = 12—6111 Likewise, letting M SB 3 be society’s marginal benefit (or MTWP) for plants in B’s garden, we get MSBB=(1)+(6—Qb)=7—Qb Society’s welfare is maximized when M S B A = p and M SB B = p. Therefore, we get 12—qa21 :> (1*:11 —a¥ 7—Qb=1 => (13:6 As expected each person actually plants less than the efficient amount. 4. MWTP(1) = (1000) + (1300) = 2300 > 1500, MTWP(2) = (1800 — 1000) + (x1300) = 800 —1300 + x 2 X500 < 2000 so x < 2500 Q*=1, for X > 2500 Q*=2. 5. See notes. ...
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