Public Finance Assignment
Problem 1 (Public goods/Voting) Recommended source: Rosen, Public Finance.
Citizens/voters in a hamlet inhabited by only three citizens consider the provision of street light. The marginal benefit curve of each citizen is downward sloping in the amount of street light provided. The cost of providing street light consists of erecting lamp posts and the electricity for illumination. For part a)-c) of this question, assume the following: All lamps are switched on during the hours of darkness such that the cost of providing street light is linear in the number of lamp posts erected and street light provision is financed by a local poll tax which divides the cost of providing the light equally among the citizens.
a) In a graph, determine the optimal provision of light for the hamlet and the optimal provision level from the point of view of each individual citizen.
b) Say, the three individually preferred provision levels are put for a vote in a majority voting procedure. Show that there exists an alternative which beats any other alternative if a pairwise vote is taken.
c) Does the alternative in part b) which beats any other alternative also fulfil the efficiency condition for the provision of public goods? Explain your answer.
d) Suppose that the provision of street lights is taken over by a private company which turns provision of light into a subscription service. In order to make exclusion credible, the company employs a scanning device which ensures that the light will only come on when a subscriber moves underneath a lamp post. The subscription fee covers both the cost of erecting lamp posts and the provision of electricity. Discuss whether efficiency would be violated if one of the inhabitants is unwilling to pay the subscription fee!
Problem 2 (Majority Voting/Strategic Behavior) Recommended source: Schotter, Microeconomics, chpt. 18
a) Refer to the following preference profiles over the alternatives kindergarden, swimming pool and police station
Citizens/voters in a hamlet inhabited by only three citizens consider the provision of street light. The marginal benefit curve of each citizen is downward sloping in the amount of street light provided. The cost of providing street light consists of erecting lamp posts and the electricity for illumination. For part a)-c) of this question, assume the following: All lamps are switched on during the hours of darkness such that the cost of providing street light is linear in the number of lamp posts erected and street light provision is financed by a local poll tax which divides the cost of providing the light equally among the citizens.
a) In a graph, determine the optimal provision of light for the hamlet and the optimal provision level from the point of view of each individual citizen.
b) Say, the three individually preferred provision levels are put for a vote in a majority voting procedure. Show that there exists an alternative which beats any other alternative if a pairwise vote is taken.
c) Does the alternative in part b) which beats any other alternative also fulfil the efficiency condition for the provision of public goods? Explain your answer.
d) Suppose that the provision of street lights is taken over by a private company which turns provision of light into a subscription service. In order to make exclusion credible, the company employs a scanning device which ensures that the light will only come on when a subscriber moves underneath a lamp post. The subscription fee covers both the cost of erecting lamp posts and the provision of electricity. Discuss whether efficiency would be violated if one of the inhabitants is unwilling to pay the subscription fee!
Problem 2 (Majority Voting/Strategic Behavior) Recommended source: Schotter, Microeconomics, chpt. 18
a) Refer to the following preference profiles over the alternatives kindergarden, swimming pool and police station