Dave and Art live in a new housing development and would like to have streetligh

Question

Dave and Art live in a new housing development and would like to have streetlights installed to illuminate the streets and sidewalks at night The table shows Dave and Art's individual marginal benefits for different quantities of streetlights that could be installed in the neighborhood. Suppose that the marginal cost of installing a streetlight is S6. 1. If Dave had to pay for streetlights on his own, how many streetlights would there be? a) 0 b) 1 c) 2 d) 3 2. What is the socially optimal number of streetlights that should be installed in the neighborhood? a) 1 b) 2 c) 3 d) 4

Explanation / Answer

1. Two street lights would be there if Dave pays on its own. An individual pays for the street light where his marginal benefit= marginal cost. Here he pays $6 , so he will increase the quantity until his marignal benefits equals $6. The quantity of street light is 2. The other individual free rides since street lights are non-exlcludable and non-rival.

2. Social Optimum is achieved when,

Marginal benefit of Davis + Marginal Benefit of art = MC

Socially optimal quantity of street lights are 3.

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