1.1. The town of Centreville, population 16, has two types of residents, Homebodies and Revelers.

Using the accompanying table, the town must decide how much to spend on its New Year’s Eve party. No individual resident expects to directly bear the cost of the party.

a. Suppose there are 10 Homebodies and 6 Revelers.

Determine the marginal social benefit schedule of money spent on the party. What is the efficient level of spending?

b. Suppose there are 6 Homebodies and 10 Revelers.

How do your answers to part a change? Explain.

c. Suppose that the individual marginal benefit schedules are known but no one knows the true proportion of Homebodies versus Revelers. Individuals are asked their preferences. What is the likely outcome? Why is it likely to result in an inefficiently high level of spending? Explain.

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Money spent on party $0 Individual marginal benefit of additional $1 spent on party Homebody Reveler $0.05 $0.13 0.04 0.11 3 2 1 WW 0.03 0.09 0.02 0.07