Question

1. Suppose that there are only three people that live in a (very) small town: Eric, Greg, and Katie. The town is thinking of building a park which you can assume is a public good for these three individuals in the town. Based on the individuals’ demand schedules for the park, which are given below, calculate and graph the social marginal benefit curve for the park.

Eric’s Demand			Greg’s Demand			Katie’s Demand
Price per Acre	Number of Acres		Price per Acre	Number of Acres		Price per Acre	Number of Acres
$14	1		$11	1		$18	1
$13	2		$10	2		$17	2
$12	3		$9	3		$16	3
$11	4		$8	4		$15	4
$10	5		$7	5		$14	5
$9	6		$6	6		$13	6
$8	7		$5	7		$12	7
$7	8		$4	8		$11	8

b. Assume that the supply curve for the park is shown in the following chart. Graph this supply curve on your graph from part b. What is the socially optimal size of the park (in acres)?

Supply Curve
Price per Acre	Number of Acres
$13	1
$17	2
$22	3
$27	4
$31	5
$35	6
$39	7
$44	8

Answer 1

a.As park is a public good we have to make vertical summation to determine that total quantity and price demanded. Public goods are characterised by non rival and non exclusion. Non- rival means a comsumption of one does not reduce quantity available to othe person. Thus to obtain marginal benefit schedule we added the prices per acres three people are willing to pay for a given number of acres of land. when demans is One acres, they are together willing to give $43 ($14+$11+$18). whole schedule is given below. And marginal benegit curve has been drawn on the basis of it.

price	Number of Acres( Total demand )
$43	1
$40	2
$37	3
$34	4
$31	5
$28	6
$25	7
$22	8

b. Supply schedule represent cost of supplying a particular unit of public good. Marginal cost curve and marginal benefit curve together determine socially optimal output and price. Hence intersection between marginal benefit and marginal cost is price per acres $31 and quantity of acres 5 of park. Thus inorder to avail 5 acres of park three people together pay $ 31 per acres

Price per acres	Quantity Supplied
$13	1
$17	2
$22	3
$27	4
$31	5
$35	6
$39	7
$44	8