Question

In a city called Economics, there live two inhabitants: Ann and Bob. The city council has agreed for providing public good G, which would be financed only from the inhabitants’ contributions. Ann and Bob have identical utility functions: U(X, G) = 2ln(X) + ln(G), where X denotes private consumption and G the consumption of the public good. The amount of the public good provided is equal to the number of units purchased by Ann and Bob together. Both Ann and Bob has income of 200, each. The unit price of each good is equal to 1.

a) How many units of G will be delivered without any intervention in the market mechanism?

b) What amount of G is socially optimal?

c) Suppose the city council is unhappy with the market allocation and levied a lump-sum tax

of 10 on each inhabitant. Revenues from the tax are spent for providing the public good.

Is the Pareto efficient allocation reach then?

d) Suppose now that the city council is still unhappy with the allocation and, instead of the

lump-sum tax from c, the council charges Ann with the tax of 50 and Bob with the tax of 25. The tax revenues are again used for the provision of the public good. How many units of G are finally delivered? How many units of G will Ann buy, and how many will Bob buy? Compare this situation with point c).

Answer 1

In economics, in the market mechanism is a mechanism by which the use of money exchanged by buyers and sellers with an open an understood system of Valium and time trade off in the market tend and optimize distribution of goods and services in at last some ways. The mechanism is can exist in free market or in captive or controlling Market that seeks to use supply and demand. Some other form of charging for scarcity to choose among production possibility. In a free market economy are resources are allocated in private sector. G is delivered to equal for x. Without any intervention in the market mechanism.