1. Public Goods Provision and Lindahl Prices
A small town is considering building a public park that benefits all three of its residents: Alice, Bob, and Carol. The park is a pure public good, meaning that once it is built, everyone can enjoy it without reducing the benefit to others. Each person has a different willingness to pay (marginal benefit) for additional acres of park space. Their marginal benefit functions are given as follows:
Alice: MB=20−Q where Q is the number of acres of park space.
Bob: MB=15−2Q The marginal cost (MC) of providing each acre of the park is 25.
Carol: MB=10−0.5Q
1.1 Find the socially optimal provision of the park.
1.2 Calculate the Lindahl tax prices for each individual at the optimal quantity Q*.
1.3 What challenges might arise in implementing this taxation method?
1.4 How could free-riding or misreporting affect the provision of public goods?