Question

A certain locality wishes to build an open space and recreation facility of 100 acers. To raise the necessary funds, the town’s treasurer suggests to derive the aggregate demand function for this facility and set it to equal the marginal costs of building the facility in order to obtain the optimal price that users should be charged.

a. Use a graph to explain the treasurer’s approach. Do you agree to it? Explain why

b. If you disagree, suggest an alternative approach, which will explicate what charges should be levied. Use a graph to that end.

c. What is the key problem with your kind suggestion?

d. What other solutions are there for the funding of such a facility?

Answer 1

a) According to treasurer's approach price should be set according to the marginal cost just like perfect competition. Since like perfect competition here also interaction between market supply and demand eqilibriate price and quantity demanded. Also it is true that here for recreational purpose only they wish to raise funds not for profit motive thus just like perfect competion they want to just earn normal profit just to cover up the cost. Thus they want to charge only optimal price.

b) There will be a problem in treasurer's approach since there might be a problem of free rider. Few may do not show their willingness for the project and thus reject to pay. Though after the completion of the project they will reap the benefit.

Thus, an annual or monthly fee might be taken from all and that must be a compulsory payment for the members of the society which can be used for the improvement of the society and also at the time of requirement or emergency. Thus, the monthly or yearly amount that should be charged should be a meagre amount so that each and every citizen can easily pay without any burden. If a sudden amount for any development is charged then it might be impossible for many of the citizens to bear the chargeable amount since they may not adjust the extra expenditure with their available income level.

The compulsory payment as shown in diagram is (P₁ - P₂). Thus, due to the increase in price there is excess supply and as supply increases and compulsory payment is done automatically demand matched the excess supply. Hence, at new higher price quantity demanded for the benefits and services will also increase. That is to say as the citizens are paying the compulsory payment for the betterment of the society their demand for the social welfare also increases.

c) There might be a key problem, few citizen may not be willing to give the duty like charge imposed on them for the development of the society monthly or yearly. As it might be also a burden for the lower income level group of citizen.

d) The only other solution to the problem can be to charge according to the ability to pay and willing to pay approach. That is, those who are willing to pay will pay and that also depends upon their ability to pay.