Anna and Bob are the only residents of a small town. The town currently funds its fire department solely from the individual contributions of these two residents. Each of the two residents has a utility function over private goods ? and total number of firemen ?, of the form: ?(?,?)=2ln?+ln?. The total provision of firemen hired, ?M, is the sum of the number hired by each of the two persons: ?=??+??. Ann and Bob both have income of 200 each, and the price of both the private good and a fireman is 1. They are limited to providing between 0 and 200 firemen. For the purposes of this
Anna and Bob are the only residents of a small town. The town currently funds its fire department solely from the individual contributions of these two residents. Each of the two residents has a utility
Consider the setup from Question 2. The government proposes an alternative, market-based solution. They charge each citizen the price ? for every firemen stationed at the local fire station. Then, the price is being set at a level ?∗ at which each individual demands the socially optimal number of firemen.
What is the price ?∗p∗? Assuming that the cost of each fireman is equal to 11, would the government be able to finance the firemen using only the payments from the two citizens?
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