5. Majority rule and efficiency Andrew, Beth, Darnell, Eleanor, and Teresa share

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5. Majority rule and efficiency

Andrew, Beth, Darnell, Eleanor, and Teresa share a five-bedroom house and are all huge New York Yankees fans. The only way they can watch every away game is by getting satellite TV service. Since the TV is located in their living room, once they have satellite service, the service has the characteristics of a public good: it is nonrival and nonexcludable. The following table shows the benefit (per month) that each roommate receives from the service. Note that the average benefit from the service is $38 per person.

It is efficient for the roommates to buy the satellite TV service if it doesn't cost more than $______ per month.

uppose the roommates decide to vote on whether to buy the satellite TV service under majority rule. In addition, they agree that if they get the service, the cost will be split equally among all the roommates, whether or not they voted in favor of the service.

5. Majority rule and efficiency Andrew, Beth, Darnell, Eleanor, and Teresa share a five-bedroom house and are all huge New York Yankees fans. The only way they can watch every away game is by getting satellite TV service. Since the TV is located in their living room, once they have satellite service, the service has the characteristics of a public good: it is nonrival and nonexcludable. The following table shows the benefit (per month) that each roommate receives from the service. Note that the average benefit from the service is $38 per person. Benefit Roommate (Dollars) Andreww Beth Darnell Eleanor Teresa 30 35 45 79

Explanation / Answer

Benefit

(Dollars)

In this case economic efficiency is to serve all the individuals at the lowest possible cost so that no individual is excluded from enjoying benefit from it.

Here the lowest possible cost is $5 per month ($1 on average per person) as andrew's benefit is equal to 1.

It is efficient for roommates to buy the sattelite TV service if it does not cost more than $5 ($1 on average per person) per month.

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Majority of the roommates has their benefit equals to $35 or more than that. So majority of the people will vote to buy the service if average cost per person is less than or equal to $35.

A majority of room mate will buy the service as long as it does'nt cost more than $175 ($35 per person) per month.

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Median Voter theorem explains that in voting system, majority of the voters will vote/select the outcome which is selected by the median voter.

Median voter in this case is reffered to as the voter, whose benefit is at the middlemost position compared to all. In this case Darnell is the median voter whose benefit is $35, which is exactly at the 3RD position within the 5 individuals.

The statement which best illustrates the concept of median voter in this example is,

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If the price of the service is $185(or $37 per person) they will buy the service since the average cost is below the average benefit which is $38 for most of the persons.

If the price of the service is 185 (or $37 per person) then under majority rule,

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The majority rule does not always end in an economic efficient outcome since the majority decision may not be beneficial for every one causing inefficiency among them.

Making social decisions by majority rule does not always end in an economically efficient outcome.

Roommate

Benefit

(Dollars)

Andrew 1 Beth 30 Darnell 35 Eleanor 45 Teresa 79

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