Question

Consider two Cubans, Jose and Sara. They each enjoy parks but to a different degree. MWTPJOSE= 10-2Q, while MWTPSARA= 5-Q. The MC of park provision is MC = 3+Q. Find the socially efficient number of parks, and theequilibrium 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, yes

b)3, 3, no

c)3.5, 2, yes

d)2, 3.5, yes

e)4, 4, no

Answer 1

Here, park is a public good.

Hence, we aggregate the MWTP schedules and calculate the socially optimal quantity

So, MWTP = MWTPJOSE + MWTPSARA = 15-3Q

At equilibrium,

MWTP = MC

So, 15 - 3Q = 3 + Q

Hence, socially efficient quantity is 3 parks. At Q = 3, MC = 3 + Q = 6

Hence, cost of 1 park is 6

Now, both have to pay 3 each for 1 park, but their MWTP are

MWTPJOSE= 10-2Q = 4

MWTPSARA= 5-Q = 2

For each equilibrium, MWTP = MC

So, for Jose, 10 - 2Q = 3

Also, for Sara, 5 - Q = 3

Yes, there will be a market failure as they can't agree on cost and no. of parks.

Thus, answer is option (c)