Sep 28, 2017 term paper 2

# (PREFERENCE MATCHING 2) CONSIDER TWO DISTRICTS A AND B WITH TWO TYPES OF RESIDENTS, RICH (R) AND…

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(Preference matching 2) Consider two districts A and B with two types of residents, rich (R) and poor (P). Rich residents have an income of YR ¼ 2,000 and poor residents have an income of YP = 1,000. Both districts provide a local public good for their residents. The rich residents value the local public good more than the poor residents. That is, the value of the local public good to each resident is Vi = YiG/10 – G2/2 for i = R;P, where G is the level of local public good provision. The cost of the local public good per resident is C = 5G.

a. What are the marginal value and the marginal cost of the local public good for each type of resident? b. What is the willingness to pay of the rich residents for the local public good? What is the willingness to pay of the poor residents?

c. In district A there are 400 rich residents and 200 poor residents, whereas in district B the numbers are reversed. What would be the public good provision in each district if it was decided by majority voting? What type of residents would not be happy with this voting outcome?

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