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Two flatmates Matt and Ryan are deciding how to best furnish their house. Furniture costs $100 per unit and can be considered both non-excludable and non-rival once purchased. They have the following demand curves: Matt: P=180-15Q Ryan: P=120-10Q
a) Suppose that Matt and Ryan cannot come to an agreement to share the cost of the furniture. What will be the deadweight loss associated with competitive market outcome? Calculate the surplus for Ryan in the competitive market outcome.
b) Use the Samuelson condition to determine the efficient provision of this public good. What is the socially optimal price and quantity? Knowing that Ryan is going to free ride of his provision for furniture Matt decides it would be better to just move in elsewhere. So, Liam decides to move in with Ryan instead. Liam has exactly the same individual demand curve as Ryan.
c) Suppose that Liam and Ryan cannot come to an agreement to share the cost of the furniture. Calculate the surplus for Ryan in the competitive market outcome.
d) How has Ryan's surplus changed relative to the previous part of the question? What is the reason for this change? Explain your answer.
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