Question

1. Explain how Lindahl pricing is used to determine the demand for a public good.

a. Provide an example illustrated with a diagram. (Can be hand drawn or computer generated)

b. Use your diagram to explain and show how the Samuelson Rule would be used to determine the optimal amount of the public good to provide.

Answer 1

1. LINDAHL PRICING IS A CONCEPT WHICH IS COMPLETELY BASED ON THE INDIVIDUALS PAY FOR A PUBLIC GOOD WHERE IT DEPENDS ON THERE MARGINAL BENEFIT THAT CAN BE OBTAINED FROM A CONSUMPTION OF THE ADDITIONAL GOOD. IT IS MADE UP WITH THE WILLINGNESS TO PAY FOR THE PRODUCT PRODUCED.

A) EXAMPLE LET US ASSUME HARISH AND PADMA DECIDED TO GO FOR AN NEHRU PARK THIS EVENING THERE THE MARGINAL COST IS RATED AT $10 AND THE AREA FOR THAT PARK IS COVERED AT 60 ACRES.

a)HERE HARISH MARGINAL WILLING TO PAY $20 FOR 1 ACRE AND FOR $10 FOR 20 ACRE AND HIS WILLINGNESS TO PAY FOR THE PARK WOULD BE ZERO AT THE OCCURRENCE OF 60TH ACE OF THE PARK.

b) PADMA WHO IS WILLING TO VISIT THE PARK ALSO HAD THE WILLING TO PAY FOR IT. FOR 1 ACRE $40 AND FOR 20TH ACRE $30 AND AT 60TH ACRE THE LEVEL OF PAYING WOULD BE AT AXIS.

HERE THE COMBINED MARGINAL WILLINGNESS PAY IS FOR 1ST ACRE $60 , 20TH ACRE $40 , 60TH ACRE IS ZERO IN BOTH CASES.

B) THE SAMUELSON RULE IS ALSO SATISFIED WITH THIS CONCEPT AS THE EFFICIENT USE OF THIS PUBLIC GOODS AND WILLINGNESS TO PAY FOR THE MARGINAL PRODUCT IS CLEARLY STATED. HERE THE MARGINAL RATE OF SUBSTITUTION AND MARGINAL RATE OF TRANSFORMATION BETWEEN THE PUBLIC AND PRIVATE GOODS ARE CLEARLY UNDER THE CONSIDERATION AND MADE THIS THEORY SUCCESSFUL .

THERE THE OPTIMAL AMOUNT OF PUBLIC AND PRIVATE GOODS CAN BE CLASSIFIED OR FORMULATED AS