1. Consider a community of 3 households. The marginal benefit/inverse demand for
ID: 1120447 • Letter: 1
Question
1. Consider a community of 3 households. The marginal benefit/inverse demand for police protection services (denoted as S) for each household is given below:
MB1 = 210 – S
MB2 = 100 – S
MB3= 50 – S
The marginal cost of providing police protection services is 240 per unit. Police protection services are a non-rival good. The community is committed to treating the police protection services as nonexcludable.
a. What is the efficient quantity of police protection services for this community?
b. What is the non-cooperative equilibrium quantity of police protection services? Explain briefly.
c. Suppose the three households agree to divide up the costs per unit equally, i.e. the price of police protection to each household would be Pi = 80. The community must agree on one common quantity to buy. Suppose the households decide to buy the largest quantity that a majority of the households will support. What is the majority voting choice?
Explanation / Answer
Police protection is a public service or public good and market demand curve for public good is found out by the vertical summmation of demand curve
Thus Total marginal benefit=360-3S and MC=240
For aocially efficient quantity=360-3S=240
S=120/3=40
2) non vooperative equilibrium will be S=0 because individually noone has incentive to take police protectiom service because there marginal benefit<marginal cost.
3)majoritg voting choice will support S=20 because if S becomes 21 then 2 voter will go against it.
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