Reference no: EM131777243

Question: a. A local government authority wants to determine how many times to clean a residential street per month. It costs $120 to clean the street. There are 20 houses in the street. Ten households each have a monthly demand for street cleaning equal to Q_A = 5 - 0.25P where the subscript A stands for type A household. The other ten type B households have a demand equal to Q_B = 5 - 0.5p. What is the efficient number of street cleanings per month?

i. What would be the net benefit to all the street residents if the efficient number were provided? Support your answer with a graphical illustration.

ii. Suppose that the local government decides to provide the cleaning services to the street and finance it out of taxes. Show that the local government can achieve the social optimum by setting the correct tax prices tA and tB on type A and type B households, respectively. What taxes should it set?

b. Explain why a set of tax prices such as the one proposed in (a)(ii) is unlikely to provide the proper incentives for individuals to reveal their true preferences for the public good. What other taxes have been proposed in the public goods literature to induce individuals to reveal their true preferences for public goods? What is the main principle guiding the alternative tax proposal? What are the main drawbacks?