4. (10 points) The problem of public goods provision (discussed earlier in the t

Question

4. (10 points) The problem of public goods provision (discussed earlier in the textbook) can also be thought of as a problem of asymmetric information. Suppose there is a house with 5 roommates. Each roommate places the following value on having a communal fridge, which costs $500. Given the total value is S540, it is economically efficient for the roommates to purchase the fridge Value (Willingness to Pay) Batman Diana Prince Superman Aquaman The Flaslh $150 $150 $80 $80 $80 (a) Suppose each roommate is asked to pay $100 if the fridge is purchased. What would happen if the purchase decision were put to a vote? (b) What if each roommate simply chipped in his willingness to pay, and all leftover money got used to buy food for the fridge. Why might this not work? And why might this plan work if there were no asymmetric information?

Explanation / Answer

A) good will not be purchased because only 2 Batman and Diana Prince will be willing to pay 100 for good. Thus 500 will not be collected with this method.

B)when there is no asymmetric information then everyone will pay according to their willingness to pay and public good will purchased because value=money collected=540>500. But if there is assymetric information the everyone will reveal the wrong willingness because everyone knows they will be charged according to willingness to pay and good will not available

Related Questions

Navigate

• Browse (All)
• Browse 4
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.