Question
A tiny country of 4,000 inhabitants needs to fund its national defence. All individuals have identical inverse demand functions = 25 and the marginal cost
A tiny country of 4,000 inhabitants needs to fund its national defence. All individuals have identical inverse demand functions = 25 and the marginal cost is 20,000. (a) Calculate the socially efficient level of output when individuals pool their resources. How much would each person be paying per unit of output? (b) Calculate the individual consumer surplus if all inhabitants decide to contribute to national defence. Illustrate this graphically. (c) Calculate the individual consumer surplus of one of the inhabitants if he/she decides to free ride. Illustrate this graphically. (d) Outline the characteristics of a public good, the problem that they pose and a potential solution the government may have to avoid such an issue.
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