Exam 35: Public Goods

Bob and Ray are thinking of buying a sofa. Bob's utility function is U_B(S, M_B) = (1 + S)M_B and Ray's utility function is U_R(S, M_R) = (3 + S)M_R, where S = 0 if they don't get the sofa and S = 1 if they do and where M_B and M_R are the amounts of money they have respectively to spend on their private consumptions. Bob has a total of $2,000 to spend on the sofa and other stuff. Ray has a total of $2,400 to spend on the sofa and other stuff. The maximum amount that they could pay for the sofa and still arrange to both be better off than without it is

If a pure public good is provided by voluntary contributions, economic theory predicts that in general too little will be supplied.

If the supply of public goods is determined by majority vote, then the outcome must be Pareto optimal.

If preferences are single peaked, then everyone will agree about the right amount of public goods to be supplied.

Economists define public goods to be those goods that are supplied by the government and private goods to be those goods that are supplied by the private sector.

A tax imposed on polluters to give them an incentive to make an efficient reduction in pollution is called a Clarke tax.