8. The table below gives the marginal benefits that Mario and Niko receive from

Question

8. The table below gives the marginal benefits that Mario and Niko receive from the town’s street lighting [12 points]:

Number of Street Lights MB to Mario MB to Niko

1 10 12

2 8 9

3 6 6

4 4 3

5 2 0

a) Are the town’s street lights a private or public good?

b) Suppose that Mario and Niko are the only residents in the town. The price of a streetlight is $7.50. If there is no collective action, how many streetlights will be purchased between Mario and Niko? Is this the efficient number of streetlights?

Explanation / Answer

(a) A streetlight is an example of a public good. It is non-excludable and non-rival in consumption.

(b) given the marginal benefits ,

2 streetlights will be purchased between mario and niko at $7.50 per price of a streetlight.and this is not the efficient number of streetlight because at this price level and number of purchased streetlights , niko is getting higher marginal benefits then mario but he is spending the same amount. efficient number of streetlight is 3 since at this level both of them have same marginal benefits.

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