Consider the following marginal benefit (demand) curves of two individuals for a certain good: MBA(q) =
100 – q and MBB(q) = 300 – q.
First assume this is a private (rival) good, such as Crispy Tofu.
Find the Aggregate demand curve for Crispy Tofu. Hints: qA+B = qA + qB, draw both curves on a graph to
visualize them better (optional).
Find the Aggregate demand curve for Fireworks in The Park (Marginal Social Benefit curve). Hints: MSB =
MBA+B = MBA + MBB, draw both curves on a graph to visualize them better (optional).
Assuming no cooperation between person A and B, who will provide the good and who will free ride?
Find qM, the amount of Fireworks in the Park provided by the Market, when individuals provide the good
with no co-operation and act only in their self-interest.
What is the efficient level of Fireworks in the Park, q*?
Person B brings a friend to the park (person C), with the same MB curve as theirs (MBC = 300 – q). Find
the new quantity provided by the Market (qM) and the new efficient level of Fireworks in the Park (q*).
Despite being visually appealing, fireworks are known to cause negative externalities such as noise
pollution and increased deaths by heart attacks in dogs. We estimated the marginal external costs of
Fireworks in the Park, MEC (q) = 70 + q. What is the new efficient level of Fireworks in the Park? Consider
the MSB curve found in part f, which includes person C. How does this new efficient allocation compare to
the Market equilibrium, qM, found in f?
From now on assume this is a public (nonrival) good, such as Fireworks in the Park.
Consider the Marginal Private Costs of providing Fireworks in The Park, MC(q) = 50 + q.
Sample Solution
