= b) Consider agent A with (inverse) demand curve for the public good PA = 60 - 2QA and agent B with inverse demand PB 90 - 50B, where prices are measured in £ per unit. The marginal cost of producing the public good is £10 per unit. What is the Pareto efficient level of the public good? Explain. Illustrate in a graph. [Hint: Compute the marginal social benefit of the public good by adding up the demand curves vertically, over the p's] c) Describe the Vickrey-Clarke-Groves (VCG) Mechanism, provide examples and discuss problems with the VCG mechanism.

= b) Consider agent A with (inverse) demand curve for the public good PA = 60 - 2QA and agent B with inverse demand PB 90 - 50B, where prices are measured in £ per unit. The marginal cost of producing the public good is £10 per unit. What is the Pareto efficient level of the public good? Explain. Illustrate in a graph. [Hint: Compute the marginal social benefit of the public good by adding up the demand curves vertically, over the p's] c) Describe the Vickrey-Clarke-Groves (VCG) Mechanism, provide examples and discuss problems with the VCG mechanism.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Question

PLEASE ANSWER PART b) and c) only

a) State the condition for the Pareto optimal provision of a public good. Interpret the condition.
b) Consider agent A with (inverse) demand curve for the public good PA = 60 - 2QA and agent
B with inverse demand PB = 90 - 5QB, where prices are measured in £ per unit. The marginal
cost of producing the public good is £10 per unit. What is the Pareto efficient level of the public
good? Explain. Illustrate in a graph. [Hint: Compute the marginal social benefit of the public
good by adding up the demand curves vertically, over the p's]
c) Describe the Vickrey-Clarke-Groves (VCG) Mechanism, provide examples and discuss
problems with the VCG mechanism.

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