Question

The purpose of this exercise is to show how the public sector will allocate private and public goods. Unlike the private sector the public sector decision to provide a good is based on a collective political decision rather than a market based decision.  For each type of good your decision to provide the good must meet the following conditions: the total must receive a majority of voting support and it must raise enough taxes to cover costs.   Every resident pays the same amount of taxes.

Private Good.   In the table below are three individual demand schedules for ECONOBREAD. The weekly amount of bread loaves demanded per week is provided for each price.  It costs you $3 to produce each loaf of bread.  There are no fixed costs.

Price ($/loaf of bread per week)

             7          6          5          4          3          2          1          

#1        2          2          3          3          3          4          4          

#2        0          0          0          1          1          1          2          

#3        1          2          2          2          3          3          3                      

Market Demand Q^d =            __        __        __        __        __        __        __

Competitive Solution: P = MC , Qc = _____, Pc = _____

Total Cost of Production = ____ Total Taxes from each resident = TC/3 = _____

Resident Total Valuation =                #1 = _____, #2 = _____, #3 = _____

Vote on Production (Y or N)              #1 = _____, #2 = _____, #3 = _____

Impact on Budget = Total Taxes – Total Cost = _____ - _____ = _____

Public Good.This good being distributed is a pure public good.  Once produced it can be offered to anyone without a reduction in quantity.  A firm offers free videos to customers.  The table below lists three customers and the value they place on the number of movies offered each week.  It costs the firm $8 per video to supply.  

# of videos per week

1          2          3          4          5          6          7

Value to Cust. #1        6          5          5          5          4          4          4

Customer #2               2          2          2          1          1          1          0

Customer #3               4          4          3          3          3          2          2          

Total Value of good               __        __        __        __        __        __        __

Competitive Solution: Total Value = MC, Qc = _____

Total Cost of Production = _____Total Taxes from each resident = TC/3 = _____

Resident Total Valuation =                #1 = _____, #2 = _____, #3 = _____

Vote on Output level (Y or N)            #1 = _____, #2 = _____, #3 = _____

Impact on Budget = Total Taxes – Total Cost = _____ - _____ = _____

Answer 1

PRIVATE GOOD:

Market Demand Qd = 42

Competitive Solution: P=MC , Qc= 294 , Pc= 7

Total Cost of Production = 126 , Total Taxes from each resident = TC/3= 3.1

Resident Total valuation = #1 = 21 , #2 = 5 , #3 = 16

Vote on Production (Y or N)    #1 = Y , #2 = Y , #3 = Y

Impact on Budget = Total taxes – Total Cost = 130.2 – 126 = $4.2

PUBLIC GOOD :

Total Value of Good

                Week               1        2        3       4        5        6       7

Total Value of Good=   12     11      10      9        8        7       6

Competitive Solution : Total Value = MC, Qc= 63 , Total Taxes from Each resident = TC/3 = 8.1

Resident Total Valuation =     #1 = 33 , #2 = 9 , #3 = 21

Vote on Output level (Y/N)=   #1 = Y , #2 = Y , #3 = Y

Impact on Budget = Total taxes – Total Cost = 510.3 – 504 = $ 6.3