10. Consider 3 neighbors (Ben, Jill and Lisa) deciding whether or not to have a

Question

10. Consider 3 neighbors (Ben, Jill and Lisa) deciding whether or not to have a streetlight in the neighborhood. The light costs $600. They agree in advance that if the light is provided they would share the costs equally. Ben is willing to pay $150, Jill $125 and Lisa $425 for the light. Since total benefit = 700 > 600 cost, the provision of the light is optimal. (3+4+3-10 marks) Calculate the externality imposed by the presence or absence of each of them and the Clarke tax on each of them. a) b) If Ben misreports his willingness to pay as 0, calculate the Clarke tax to be imposed on him.

Explanation / Answer

A) since the social benefit is greater than which means there is positive externality but clarle tax of 200 paid by each is not feasible because Ben and Jill will not pay

B)if ben misreports willingness to pay=0 then also ben needs to pay 200 as promise in advance

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