microeconomics, externalities

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Question description

Suppose three neighbors must vote on installation of a traffic light that costs $210. All three will share the cost of the light – that is, each person will contribute $70 to the installation. Leona values the light at $50; Lionel values the light at $50; and Theo, who drives the most, values the light at $200. 

a) Explain why the traffic light is a public good.

 b) Is it efficient for the traffic light to be installed? Why or why not? 

c) Suppose a majority rule vote is held to determine whether the light should be installed. Will the light be installed? Explain any differences between this result and your answer in part (b). 

Tutor Answer

(Top Tutor) Daniel C.
School: UCLA
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