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Suppose that two individuals, Jon and David, form a community and would like to construct a communal fort that would protect them from attacks. They
Suppose that two individuals, Jon and David, form a community and would like to construct a communal fort that would protect them from attacks. They consume both good X, a private good, and the protection from the fort, P. One unit of good X costs 1 unit while one unit of P costs 2 units, so the budget constraint for each is given by: Xi + 2Pi = 100. Both Jon and David have an income of 100 and a utility function of the form:
U = log(Xi) + 2log(Pj + Pd)
- How much protection, P, will be privately provided? What is optimal consumption of X, the private good?
- What are the socially optimal amounts of protection, P, and consumption, X, of the private good? How do the socially optimal amounts compare to that privately provided? Explain why
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