What prices should it set?

s demand for bike paths a public good is given Show more Andrew Beth and Cathy live in Lindhville. Andrews demand for bike paths a public good is given by Q = 12 2P. Beths demand is Q = 18 P and Cathys is Q = 8 P/3. The marginal cost of building a bike path is MC = 21. The town government decides to use the following procedure for deciding how many paths to build. It asks each resi- dent how many paths they want and it builds the largest number asked for by any resident. To pay for these paths it then taxes Andrew Beth and Cathy the prices a b and c per path respectively where a + b + c = MC. (The residents know these tax rates before stating how many paths they want.) a.) If the taxes are set so that each resident shares the cost evenly (a = b = c) how many paths will get built? b.) Show that the government can achieve the social optimum by setting the correct tax prices a b and c. What prices should it set? Show less


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