Question

1. 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.
2. 1. 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.
   2. Describe why aggregation of individual demand functions differs for public goods compared to private goods. (why not how they are aggregated differently)
3. 3. 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)

Answer 1

Ans:-

B).Aggregate demand (AD) is required for finding the gross domestic product (GDP) of a country in a given period of time. It indicates economic growth; if AD increases substantially from the last year then such growth is substantial too; otherwise the economy is required some corrective measures, like monetary policy, fiscal policy, etc.

The goods which are easily available in the society and the use of those are not restricted for anyone is public goods.

The two characteristics are as below:

Limitlessness: A public good has limitless availability, like street light.

Free accessibility: It means non-paying consumers also get the access on public good, like law and order of a country.

Because of the above two characteristics, everyone in the society gets the benefit (value) out of public good; therefore, there is adding values of consumers at given quantity level; it means vertical summation of all individual demand to get the market demand.

If there is consumers’ competition for obtaining a good, then such good is private good. Since there is completion, the good becomes rivalry. The demand of such product depends on the equality of marginal utility and price. Since the price is fixed, the market demand is obtained by adding quantities (horizontal axis) of individual demand at that price. Therefore, there is horizontal summation.

C);

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