Socially 0ptimal LevelHow does this compare to the socially optimal level of provision? The social optimum is the quantity at which the sum of the individuals' marginal rates of substitution equals the ratio of prices (which is 1 in this example). Each individual's MRS is the ratio of his marginal utility of fireworks to his marginal utility of private goods, which we obtain by differentiating the previous utility function with respect to fireworks and then again with respect to private goods. So the optimal amount of fireworks is determined by:(100−FB)/[2×(FB+FJ)]+(100−Fj)/[2×(FB+Fj)]=1Using the fact that total fireworks F=FB+Fβ we can rewrite this equation as:(200−F)/2F=1Solving this, we obtain F=66.6. This quantity is much higher than the total provision by the private market, 40 , due to the free rider problem. The public good is underprovided by the private market.
Q. Socially 0ptimal LevelHow does this compare to the socially optimal level of provision? The social optimum is the quantity at which the sum of the individuals' marginal rates of substitution equals the ratio of prices (which is 1 in this example). Each individual's MRS is the ratio of his marginal utility of fireworks to his marginal utility of private goods, which we obtain by differentiating the previous utility function with respect to fireworks and then again with respect to private goods. So the optimal amount of fireworks is determined by:(100−FB)/[2×(FB+FJ)]+(100−Fj)/[2×(FB+Fj)]=1Using the fact that total fireworks F=FB+Fβ we can rewrite this equation as:(200−F)/2F=1Solving this, we obtain F=66.6. This quantity is much higher than the total provision by the private market, 40 , due to the free rider problem. The public good is underprovided by the private market.
Understand the equation: Understand the equation for the social optimum.The social optimum is where the sum of the individuals' marginal rates of substitution (MRS) equals the ratio of prices. In this case, the ratio of prices is 1. The MRS for each individual is given by the ratio of the marginal utility of fireworks to the marginal utility of private goods. The equation provided is:2×(FB+FJ)100−FB+2×(FB+Fj)100−Fj=1We need to solve this equation to find the optimal amount of fireworks, F.
Simplify the equation: Simplify the equation using the fact that total fireworks F is the sum of FB and FJ. We are given that F=FB+FJ. We can substitute this into the equation to simplify it:2F200−F=1This equation represents the sum of the individuals' MRS and sets it equal to the ratio of prices, which is 1.
Solve for F: Solve the simplified equation for F.We have the equation:(200−F)/2F=1To solve for F, we multiply both sides by 2F to get rid of the denominator:200−F=2FNow, we add F to both sides to isolate terms with F on one side:200=3FNext, we divide both sides by 3 to solve for F:F=200/3
Calculate F: Calculate the value of F. Now we perform the division: F=3200F≈66.67 This is the socially optimal level of fireworks provision.
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