1. Consider a city populated by 2 individuals, that is considering
to provide some public good (for example fireworks). The two individuals have the following individual demand for fireworks:
Individual 1, Q = f1(p) = 30 - p
Individual 2, Q = f2(p) = 20 - 2p
Also assume that the marginal cost of producing fireworks is constant and equal to 25, that is MC(Q) = 25
(a) Assume that the city is planning to provide Q = 8 units of fireworks. Explain why this allocation is not Pareto efficient.
(b) Now assume that the city is planning to provide Q = 12 units of fireworks. Explain why this allocation is not Pareto efficient.
(c) What is the Pareto efficient provision of the public good?
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