Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

The population of Outbacktown is 1,000 people. Each of them has a marginal benefit curve for fireworks given by MB = 10 2Q dollars, where

The population of Outbacktown is 1,000 people. Each of them has a marginal benefit curve for fireworks given by

MB = 10 2Q dollars, where Q is the number of minutes of the fireworks display. The marginal cost is constant,

each extra minute costs 5,000 dollars; thus

MC = 5,000. Outbacktown is sparsely populated, and the terrain is very flat, so it is fairly safe to assume that

fireworks over there are both nonrival and nonexcludable.

(a) Obtain the optimal number of minutes that the show should last. What is the Lindahl price for each individual? (6 marks)

(b) Now suppose that the usual provider is unavailable to offer the firework display this year and the major has to go with a new provider, Mr. Smoke. Fortunately, Mr. Smoke's marginal cost is the same as the usual provider. However, the environmental quality of Mr. Smoke's display is not that great; it generates a negative externality in the health of the population that has been estimated to be 2 dollars per each minute of the show, and for each individual in the population. Obtain the optimal number of minutes that Mr. Smoke's show should last. What is the Lindahl price for each individual once that the externality has been taken into account? (6 marks)

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Microeconomics

Authors: Christopher T.S. Ragan

16th Canadian Edition

0134835832, 978-0134835839

More Books

Students also viewed these Economics questions

Question

find all matrices A (a) A = 13 (b) A + A = 213

Answered: 1 week ago