(Section 10.2) Suppose the average value that a person in a certain city places
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Question
(Section 10.2) Suppose the average value that a person in a certain city places on having 1000 extra police ofcers out on the streets for a year is $10. Some people have a higher value and some a lower value. The population is 7 million. The city government decides to ask people how much they value an extra 1000 police to see if it is worth spending the $50 million a year needed. Two questionnaires are proposed. The rst version of the question- naire asks people to assess the value to them of the extra police and explains that people will pay whatever amount they answer—on the condition that the total of answers is at least $75 million. The second version of the questionnaire also asks people to reveal how much they value the extra police, but it says that everyone will pay the same amount if the police are hired, provided the sum of the personal valuations exceeds $75 million. (a) What would be the results of the different surveys? (b) Which is better? (c) Does either survey give people the incentive to tell the truth? (d) Can you devise a survey that does make people reveal the truth?
Explanation / Answer
This problem involves free riding problem. Often with public goods which are non exclusive and non rival in nature this problem occurs where people disclose underestimated willingness to pay to receive the benefit of the good as they may also receive the benefit if other pays for it as it is of non rival and non exclusive nature.
In first survey when people will be told that they will have to pay what they answer then they will most possibly try to understate their maximum willingess to pay as they know that even if they pay less price and decision to hir more police gets checked then they will get more surplus as they still get sam e benefits by paying less than their willingness to pay. even those who have high value will disclose less wilingness because they will have to pay less than.
But in second survey if they are told that they all will be equally paying then they may not (at least all those hwo have high value) hesitate to share their true willingness to pay as they will not ask to pay more if they have greater value for the service. Hence here the burden of those who have more value gets shared on all thus they will not understate their willingness. But there is also high chance that they may overstate their value to make it exceed $75 million. ANd there is also chance that the low value people will still understate the value as they will not be muc willing to pay a high price.
Henec most likely the fisrt survey will understate the willingness of all and the second will overestimate of those who have high value.
b) As most likely the fisrt survey will understate the willingness of all and the second will overestimate of those who have high value, the second survey is better as in second survey the overestimation may be balanced with understating of value by low value people. But in first all understated values will be provided.
c) Neither the survey give people incentive to tell the truth becaus ein both surveys they have either incentive to understate or overstate.
d) It is very difficult, infact impossible to devise a survey that will make people tell the truth because every individual has different value for the good and the good is public good which creates free riding problem which cannot be handled.
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