There are twenty homes on King Road. The installation of a streetlight would increase the value...

There are twenty homes on King Road. The installation of a streetlight would increase the value of each by $10. The streetlight costs $100 to install. Is the street light a public good? Why or why not? Should it be installed? Why? Who is more likely to install it the government or the property owners? Why? Would your answer be different if one person owned all the houses?

Expert Solution

It is a public good because it it is non rival in consumption in the sense that others cannot be prevented from its consumption when one person is consuming it and it is also non excludable because you cannot exclude one house from not receiving the light from street light

It should be installed because the benefit is $10*20 = $200 and marginal cost is $100 which is less than the valuation by homes

It is more likely to be installed by the government because property owners suffer from free riding problem and they believe that others will pay. Because the government has the ability to provide funds and property owners individually attempt to free ride, it will not be provided by property owners

Definitely the answer is different when one person has ownership over all the houses because then there is no possibility of free ride. In that case the property owner will himself be responsible for all the cost incurred and in that scenario, after conducting the benefit in cost analysis the property owner might install the streetlight himself.

Rahul Sunny answered 1 year ago

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