Reference no: EM131242527

Law and Economics:

Good exterior home maintenance leads to higher property values throughout a neighborhood. Of course, the gains in property values must be balanced against the opportunity cost of time for those who do the maintenance. The information below applies to a particular residential neighborhood. The first two columns show a list of home maintenance tasks and how much each task would raise the total value of property in the neighborhood. (The gain in total value is spread evenly over the seven houses in the neighborhood, and everyone in the neighborhood knows and agrees upon the gain created by each task). The second two columns list the residents of the neighborhood, and the opportunity cost of a day of time for each resident. Each resident has 1 day available for maintenance work, and each task takes one day.

                Tasks                        Total Increase in Property values                   resident             opportunity cost

Plant flowers in median                                   $500                                            Pete                       $400

Install streetlights                                              $1,000                                      Angela                  $1,000

Paint shutters                                                   $800                                          Kirk                        $2,000

Replace rusty siding                                          $600                                         Ruth                       $100

Repair sidewalk                                                $900                                          Sam                        $450

Plant trees                                                         $300                                          Beverly                   $300

Plant lilacs                                                        $200                                          Gertrude                  $250

Repair curbs                                                      $400

a. Construct and plot on a single graph the marginal benefit and marginal cost schedules for home repair tasks. (Hint: the horizontal axis of this graph is the number tasks undertaken in the neighborhood, and the vertical axis is the marginal cost/benefit to the neighborhood of each task).

b. What is the optimal amount of time to devote to home maintenance in this neighborhood?

c. Who should devote time to home maintenance?

d. What tasks should be done?

e. Suppose that people are assigned tasks as follows: Pete plants flowers in the median, Angela installed the streetlights, Kirk paints the shutters, Ruth replaces siding, Sam repairs the sidewalk, Beverly plants trees, and Gertrude repairs the curbs. Each gets paid the resulting increase in property values. Does this scheme works to bring about efficient resource allocation? Explain.

f. If there were no neighborhood organization to coordinate maintenance activities, could we expect people in the neighborhood to undertake these maintenance tasks on their own? If so, which ones? If not, why not?