notes about Public Finance Essay

1844 Words Jan 6th, 2014 8 Pages
Name -----------------------------------ID# -----------------------------------Public Finance
Homework 2
Due in class – October 28
There are 20 multiple-choice questions, each is worth 5 points for a total of 100 points plus one extracredit question. Please, write with pen, print and staple this HW.
I. Externalities
Problem: Firms A and B each produce 80 units of pollution. The federal government wants to reduce pollution levels. The marginal costs associated with pollution reduction are MCA = 50 + 3QA for firm A and MCB = 20 + 6QB for firm B, where QA and QB are the quantities of pollution reduced by each firm.
Society’s marginal benefit from pollution reduction is given by MB = 590 – 3Qtot, where Qtot is the total reduction in
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Tiebout Model. Consider an economy with “i” identical individuals. Labor supply is n* =1 and it is inelastically supplied. Labor produces output Y according with the production technology Y = 2N1/2.
Utility is U(g, xi) = α*ln(g) + xi where g is a public good, α measures the intensity of the preferences for the public good, and xi is the private good. The total resource constraint is Nxi + g = 2N1/2 . The Per-capita resource constraint is xi + g/N = f(N)/N.
1. Find the optimal levels of the public good g* and community’s size N*
a)

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