The following table shows how the marginal benefit enjoyed by Ali, Fatmah,
Mohammed and all other consumers from beach guards varies with the
number made available by the Gaza City municipality per summer.
Marginal Benefit of Number of Beach Guards per Consumer (in $)
Number of Beach Guards
1
2
3
4
Ali
150
125
100
75
Fatmah
125
100
75
50
Mohammed
100
75
50
25
All others
600
400
200
100
a. If the marginal cost of hiring beach guards is $425 per guard, no matter
how many are hired, then what is the efficient number of guards to have
each summer?
At Q=3 guards: MSB=MSC ($425=$425)
b. If the number of guards from 3 were produced, how much would each
person pay under the benefit method of financing the public good?
At Q=3:
Ali would pay $100/guard * 3 guards=$300
Fatmah would pay $75/guard * 3 guards= $225
Mohammed would pay $50/guard * 3 guards=$150
All others would pay
$200/guard * 3 guards=$600
Total paid would be
$425/guard * 3 guards=$1275
1. Imagine you own an apartment in Gaza next to another apartment owner with
a baby who cries every two hours at night. The value you place on good
night’s sleep is $200. The cost of installing a sound-proof wall is $1500. The
cost of good earplugs is $50. The value your neighbor places on letting the
baby cry to get the baby used to falling asleep by himself is $500. (6)
a. If your neighbor has the right to make noise, explain the range of possible
amounts of money that would be exchanged between the two parties or costs
incurred AND the socially efficient outcome.
b. Option 1: Put up with the noise: Cost = $200
c. Option 2: Install wall: Cost = $1500
d. Option 3: Pay neighbor to console baby when he cries: Cost = >$500
e. Option 4: Buy earplugs: Cost = $50
f.
The socially optimal solution in the absence of government intervention such
as noise regulations (which is unnecessary in this situation given the small
number of parties involved and low cost of bargaining) is to buy the earplugs.
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g. Does the fact that your neighbor has the property right effect what the socially
efficient outcome is? PROVE YOUR ANSWER.
No. If I owned the right to peace and quiet, buying earplugs is still the
efficient option:
Option 1: Neighbor pays me to put up with noise: Cost = >$200
Option 2: Neighbor installs wall: Cost = $1500
Option 3: Neighbor gets up at night to console baby: Cost = $500
Option 4: Neighbor buys you earplugs: Cost = $50
2. Three voters will decide by majority rule what projects to fund. For questions
a., and b. below, assume that each of the issues will be voted on separately.
The net benefits each of the voters place on each project is given below.
Library
Voter
Keaton
Maddie
Donna
Football Field
Issue
Track
100
-125
- 10
-20
150
-30
10
50
200
a. Which issues would pass if decided by majority rule? Is this the
efficient outcome? Explain. (3)
Library would pass (2 for and 1 against). This is efficient since the net benefits of the
library is +260
Neither the track nor the football field would pass (1 for and 2 against). From an
efficiency perspective, the track should pass, however, since the net benefits of the
track is +100. The football field has negative net benefits of -35, so it should not
pass.
b. Would logrolling improve efficiency? Provide an example to support
your answer. (3)
If Keaton and Maddie trade votes, then the football field and the track would pass. As
mentioned above, although from an efficiency point of view, the track should pass,
the football field should not, so efficiency is hurt.
c. Now assume that only one project can be funded. Considering all pair
wise elections, in which two projects are voted on first, and then the
winner of that vote will vie with the third project to determine the final
outcome, would giving one person the ability to set the voting agenda
affect the outcome? EXPLAIN AND PROVE! (3)
Giving one person the ability to set the voting agenda would not affect the outcome:
the library would win no matter which pair of projects are voted on first.
F v. T: Football would win
T v. L: Library would win
F v. L:
Library would win
L>F>T
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1. Suppose that the income tax in Palestine is 5% on income over $30,000. Is
this tax progressive, proportional, or regressive with respect to income?
Explain your answer according to the given data. (2)
2. The income tax is progressive because the ATR rate increases as the base
(income) increases. Proof:
3.
4. If income = $35,000, ATR=(($35,000-$30,000)*.05)/$35,000 = 0.71%
5. If income = $50,000, ATR=(($50,000-$30,000)*.05)/$50,000 = 2.00%
6. If income= $100,000, ATR=3.5%
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