Consider the following provision of public good problem:
Citizen 1 initial budget: w1 = 80,000 $
Citizen 2 initial budget: w2 = 60,000 $
Cost of public good: C = 40,000
Citizen 1 Utility Function: U1(x1,g) = 3(x1) + 90,000g
Citizen 2 Utility Function: U2(x2, g) = 2(x2) + 60,000g
Notation: xi is the budget that citizen i spends on goods other than the public good; g is a public good indicator variable which takes on the value 1 when the public good is provided and zero otherwise.
Given this information, the level of utility of citizen 2 when 1 pays and 2 free-rides will be
Citizen 1 initial budget
Citizen 2 initial budget
Cost of public good C
Citizen 1=
Citizen 2
g is a public good indicator variable that is 1 when its value is provided and zero when otherwise not provided.
initial budget - cost of public good C.
;Budget that citizen 2 spends on goods other than public goods.
Citizen 2 utility function,
Citizen 2 utility level.
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