Question

Diane's Diamond Depot and Sean's Sock Shop are the only two stores in a small shopping center sharing a parking lot. The owner's are considering hiring a shared overnight security guard to patrol the parking lot. Assume the presence of a security guard in the parking lot will deter criminal activity to either store. Diane has very valuable inventory, and is very afraid of a break-in so she is willing to pay $700 per week for a security guard. Sean doesn't have as valuable of inventory, but is still concerned with break-ins or vandalism and is willing to pay $300 per week for a security guard. The cost to hire a security guard to patrol the lot is $800 per week.

If they are going to hire a security guard, how would you suggest the $800 per week is divided? Explain your answer. (Both tenants need to agree to this to make it happen)

Answer 1

The guard will come at $800 and no tenant is individually is capable of providing that. But since the guard is apublic good (that is, both will be able to use it once hired), they should pay for it according to the utiltiy they get from the guard. It is already said that Diane has a utility of 700 while Sean has a utility of 300. Total utility is 1000. So,

Diane's share=800*(700/1000)=560.

Sean's share=800*(300/1000)=240.

Both will agree to this as the share is lower than both individual's utility.