ufp_ps1_12_sol

Moreover the benefits are confined to individuals

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Unformatted text preview: Moreover, the benefits are confined to individuals living in the area protected by the levees. Hence, flood protection is a local public good. • The U.S. Army Corps of Engineers is in charge of building and maintaining levees. This is a federal agency that is primarily funded by federal taxes. The principle of fiscal federalism suggests that local public goods should be funded locally. Moreover, the decision regarding the level of provision should also be taken at the local level. While one can make a good argument that it makes sense to centralize the exper- tise of building and maintaining levees, it is much harder to provide justification for federal funding. Disaster relief on the other hand should be provided by the federal government as way of (partially) insuring against regional shocks. Problem 2: • For each i = 1 , 2 , 3, we can compute the marginal rate of substitution as follows: ∂U i ∂G . ∂U i ∂X i = X i G . • Now, we know that the marginal cost of the public good is 5. Thus, the Samuelson condition is: 3 X i =1 X i G = 5 , or X 1 + X 2 + X 3 = 5 G . • The aggregate resource constraint is X 1 + X 2 + X 3 + 5 G = m 1 + m 2 + m 3 = 120. • Thus, substituting the Samuelson condition into the resource constraint, we have 5 G + 5 G = 120 , which implies G * = 12. Problem 3: Shipping Lanes • As new shipping lanes open up, transportation cost will be come lower for certain products and routes. This affects the attractiveness of cities that are heavily involved in global trade. • Global warming will, for example, affect the water supplies around the world which has a large impact on the viability of many cities in arid regions....
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Moreover the benefits are confined to individuals living in...

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