1. Consider a community of five households. Fire services (F) will be supplied to the community at a price of $200/unit. Fire services are a pure public good for this community. In the private non-cooperative Nash equilibrium, the community buys 25 units of F, with all 25 units purchased by household one, and 0 units purchased by the other four households. Household one has an income of $100,000 to spend on Fire Services and All Other Goods (A). The price of A is $1/unit. a. Draw the budget constraint for houschold one on a diagram with F on the x-axis and A on the y-axis. Add an indifference curve consistent with the household choosing to buy 25 units of F. b. Suppose the community government decides to tax each of the households $1,000 and use the $5,000 in taxes collected to buy 25 units of F to be supplied to the community as a public good. Show the new budget constraint for household one. Add an indifference curve consistent with household one's new optimal level of F to be 35 units. To achieve this optimal consumption bundle, household one will buy 10 units ofF out of the household after-tax income of $99,000. c. Based on your analysis in part b, what is the extent of the crowd out of uornment nublic provision intervention?
1. Consider a community of five households. Fire services (F) will be supplied to the community at a price of $200/unit. Fire services are a pure public good for this community. In the private non-cooperative Nash equilibrium, the community buys 25 units of F, with all 25 units purchased by household one, and 0 units purchased by the other four households. Household one has an income of $100,000 to spend on Fire Services and All Other Goods (A). The price of A is $1/unit. a. Draw the budget constraint for houschold one on a diagram with F on the x-axis and A on the y-axis. Add an indifference curve consistent with the household choosing to buy 25 units of F. b. Suppose the community government decides to tax each of the households $1,000 and use the $5,000 in taxes collected to buy 25 units of F to be supplied to the community as a public good. Show the new budget constraint for household one. Add an indifference curve consistent with household one's new optimal level of F to be 35 units. To achieve this optimal consumption bundle, household one will buy 10 units ofF out of the household after-tax income of $99,000. c. Based on your analysis in part b, what is the extent of the crowd out of uornment nublic provision intervention?
Chapter8: Game Theory
Section: Chapter Questions
Problem 8.4P
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Transcribed Image Text:1. Consider a community of five households. Fire services (F) will be supplied
to the community at a price of $200/unit. Fire services are a pure public
good for this community. In the private non-cooperative Nash equilibrium,
the community buys 25 units of F, with all 25 units purchased by household
one, and 0 units purchased by the other four households.
Household one has an income of $100,000 to spend on Fire Services and All
Other Goods (A). The price of A is $1/unit.
a. Draw the budget constraint for household one on a diagram with F on the
x-axis and A on the y-axis. Add an indifference curve consistent with the
household choosing to buy 25 units of F.
b. Suppose the community government decides to tax each of the
households $1,000 and use the $5,000 in taxes collected to buy 25 units
of F to be supplied to the community as a public good.
Show the new budget constraint for household one. Add an indifference
curve consistent with household one's new optimal level of F to be 35
units. To achieve this optimal consumption bundle, household one will
buy 10 units of F out of the household after-tax income of $99,000.
c. Based on your analysis in part b, what is the extent of the crowd out of
private provision by the government public provision intervention?
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