Problem II. Short Answers (20 points, Each 5 points) Your answers can be in math, words, or graphs as long as it is reasonable.

1. Houston is one of the most flooded cities in the US. Suppose, as a solution, City wants to build a new dam which costs $50 per household. However, a voluntary campaign run by the City's representatives is unable to collect the sufficient fund despite the fact that each family is willing to pay up to $100 for building a dam to insure themselves from the flood. What is the problem? Why does it happen? And what is your proposed solution to finance the dam?

2. R&D investments in the US are subsidized by the federal and local governments. Why? What problem would happen without R&D subsidies?

3. Why might the government be less efficient in production/provision than the private sector?

4. How does warm glow solve the free rider problem?