Question

Consider a city with three consumers:1, 2, and 3. The city provides park land for the enjoyment of its residents. Parks are a public good, and the amount of park land (which is measured in acres) is denoted by z. The demands for park land for the three consumers are as follows:

D1=40-z

D2=30-z

D3=20-z

These formulas give the height of each consumer's demand curve at the given level of z. Note that each demand curve cuts the horizontal axis, eventually becoming negative. For the problem to work out right, you must use this feature of the curves in deriving De. In other words, don't assume that the curve becomes horizontal curve once they hit the axis.

A) The height of the De curve at a given z is just the sume of the heights of the individual demands at that z. Using this fact, compute the expression that gives the height up to the De curve at each z.

B)The cost of park land per acre, denoted by c, is 9 (like the demand intercepts, you can think of this cost as measured in thousands of dollars). Given the cost of park land, compute the socially optimal number of acres of park land in the city.

C)Compute the level of social surplus at the optimal z. This is just the area of the surplus triangle between De and the cost line.

D)Suppose there are two other jurisdictions, each with three consumers, just like the given jurisidiction. Compute total social surplus in the three jurisdictions, assuming each chooses the same amount of park acres as the first jurisdiction.

E) Now suppose the population is reorganized into three homogrenous jurisdictions. The first has three type-1 consumers (i.e, high demanders). The second has three type-2 consumers (medium demanders), and the third has three type-3 consumers (low demanders). Repeat (a), (b), and (c) for each jurisdiction, finding the De curve, the optimal number of park acres, and social surplus in each jurisdiction.

F)Compute total social surplus by summing the social surplus results from (e) across jurisdictions. How does the answer compare with social surplus from (d)? On the basis of your answer, are homogeneous jurisdictions superior to the original mixed jurisdictions?

G)If the social optimal is determined by majority voting, what will the outcome be? Does this match the social optimal?

Answer 1