Question

Consider the following social welfare function:

SW=U_a(X^nc_a, X^c_a, X^c_~a, P_a)+U_b(X^nc_b, X^c_b, X^c_~b, P_b)+ U_d(X^nc_d, X^c_d, X^c_~d, P_d)+...

where: X=consumption bundle, P=pollution, nc=non-competitive consumption, c=competitive consumption, a, b, d = people, ~a, ~b, ~d = all other people besides a, b, d.

Let X^c_b be a new house overlooking a canyon. Let P be the reduction in scenic beauty experienced by the community. Finally, let X^c_~b be the status impact on folks who are not b arising from the new McMansion. Assume that the positive increment to individual utility for individual b of an increase in X^c_b equals $10,000 in consumer surplus; and that the negative status increment to other people is -$500. Assume also that a one unit increase in X^c_b produces one unit of “P”, which further causes a -$1000 unit impact on utility for everyone exposed. In a world of 5 people (including Mr. b), what are the private benefits to Mr. b of consuming one more unit of X^c_b? What are the external costs of a one unit increase in X^c_b? What will be the net increase in SW of a one unit increase in X^c_b?

Answer 1

Explanation:-

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