Question

1. Many people in the small town of Econville have complained that there is no park for children to use afterschool. There are 20 households in the town, 10 who have children and 10 who do not. The households with children value the park being built at $100 each while the other households value it at $20 each. The town estimates that the cost of building a park is $600. All households earn the same income.

   1. (a) Would describe the park as a public good? Explain.

   2. (b) The first proposal is fund the park with a flat tax. What is the minimal tax per household required to build the park? Who will and who will not support such a tax and will the park be built?

   3. (c) A second proposal is a tax that only applies to the households with children. What tax per household will ensure that the park is built? Who will and who will not support such a tax? Why?

   4. (d) Athirdproposalisataxpaymentthatisproportionaltothebenefiteachhousehold receives from the park. In this proposal, how much will each household be expected to pay? Who will and who will not support such a tax? Why?

   5. (e) Evaluate the three policies listed and state which you will choose and why.

Answer 1

a) Yes, the park would be a public good. This is because the people of the town are free to use it irrespective of whether they have paid for it or not.

b) The cost of setting the park is $600 and there are 20 households. So each of them would have to pay a flat tax of $600/20=$30

If the tax is $30, the 10 households with children would be willing to pay the tax and the rest of them won't be willing to support the tax.

No, the park won't be build.

c) If the tax only applies to people with children, then a total of $600 needs to be collected from 10 households. So a tax of $60 would be paid by each of them. Since their willingness to pay is $100, each of them could pay a tax of $60, so the park would be built.

d) The tax is based on the value each type of household is willing to pay. So the ratio would be 100:20=5:1. This means that households with children are willing to pay 5 times than that without children. So 10 households would be paying 500 ie $50 each and the rest 10 would be paying 10 each.

This would mean 50*10+10*10=500+100=$600.

Both of the types would be willing to support this policy and the park would be build.

e) Given the three policies, the first would not be effective ,since it is not leading to construction of park . From the second and third, the third policy is more beneficial because it is focusing on the proportional value by both types of households, which seems to be a better way , because the public good is also provided for and people pay according to their willingness to pay..

I would prefer the third type of policy.

(You can comment for doubts)