Question: a village of 20 people is deciding how much openspace...
- A village of 20 people is deciding how much open-space land to acquire. Because of differences in preferences, there are two types of demand functions for open-space land amongst the citizens. In particular, 10 of the people have a demand function given by P = 10 – Q, while the remaining 10 have the demand function P = 8 – 2Q, where Q is quantity of open-space in acres and P is price in dollars.
- Since the open-space land is both non-excludable and non-rival, it can be considered a public good. What is the equation for the market demand function for open-space land? Depict the market demand function graphically.
- Describe why aggregation of individual demand functions differs for public goods compared to private goods. (why not how they are aggregated differently)
- If the marginal cost of an acre of open-space is $40, what is the socially optimal quantity of open-space land? In other words, what quantity of land maximizes net social benefits (social benefit – social cost). Illustrate this point on the graph that you drew in part (a)