Question

Consider two Cubans, Jose and Sara. They each enjoy parks but to a different

degree. MWTP JOSE = 9 - 2Q, while MWTP SARA = 6 - Q. The MC of park provision is MC = 3+Q. Find the socially efficient number of parks, and the equilibrium cost per park (of park - provision). Consider that the regulator approaches Jose and Sara and asks each to contribute half that cost (as in marginal cost per park, not total). Jose will want ___ parks and Sara will want ___ parks. Will there be a market failure?

a)3, 3, no

b)3, 3,yes

c)3.5, 2, no

d)2, 3.5, no

e)4, 4, yes

Answer 1

The socially efficient number of parks is determined by the interaction of Marginal social benefit and marginal social cost

MWTP JOSE + MWTP SARA = MC

9 - 2Q + 6 - Q = 3+Q

15 - 3 = 4Q

12 = 4Q

Q = 3 and so the equilibrium cost per park (of park - provision) = MC = 3 + 3 = $6.

If they have to pay half, Jose will want 3 = 9 - 2Q or Q = 6.2 = 3 ___ parks and Sara will want 3 = 6 - Q or Q = 3 ___ parks.

No market failure because each of them wants 3 parks to be provided and this equal to social optimum quantity

Select Option A.