Kris, Taylor and Max are the only three residents in a neighborhood. A public good that would benefit all of them has a one-time installation cost of $900. The value of the public good to each resident is shown in the table below. Any tax plan must be approved by simple majority. $$\begin{array} { | c | c | c | }
\hline \text { Resident } & \text { Reservation Price } & \text { Income } \
\hline \text { Kris } & \$ 100 & \$ 1,000 \
\hline \text { Taylor } & \$ 200 & \$ 5,000 \
\hline \text { Max } & \$ 700 & \$ 6,000 \
\hline
\end{array}$$ If the government proposes to pay for the public good with a proportional income tax of 8 percent, then:

Question

Kris, Taylor and Max are the only three residents in a neighborhood. A public good that would benefit all of them has a one-time installation cost of $900. The value of the public good to each resident is shown in the table below. Any tax plan must be approved by simple majority. $$\begin{array} { | c | c | c | } 
\hline \text { Resident } & \text { Reservation Price } & \text { Income } \
\hline \text { Kris } & \$ 100 & \$ 1,000 \
\hline \text { Taylor } & \$ 200 & \$ 5,000 \
\hline \text { Max } & \$ 700 & \$ 6,000 \
\hline
\end{array}$$ If the government proposes to pay for the public good with a proportional income tax of 8 percent, then:

Quizplus · Accepted Answer

To determine the overall benefit of the public good, we need to compare the total reservation price of the three residents to the cost of the public good.

Total reservation price = $100 + $200 + $700 = $1,000

Since the total reservation price is less than the cost of the public good ($1,000 < $900), it is not individually rational for any of the residents to pay for the public good on their own.

Therefore, the only way to provide the public good is through a tax. The government proposes a proportional income tax of 8%, which means that each resident would pay a tax proportional to their income.

Kris would pay 8% of $1,000 = $80. Kris would be willing to pay up to $100 for the public good, so Kris would vote in favor of the tax.

Taylor would pay 8% of $5,000 = $400. Taylor would be willing to pay up to $200 for the public good, so Taylor would vote against the tax.

Max would pay 8% of $6,000 = $480. Max would be willing to pay up to $700 for the public good, so Max would vote in favor of the tax.

Therefore, Kris and Max would vote in favor of the tax, but Taylor would vote against it. Therefore, the answer is C.

Kris, Taylor and Max Are the Only Three Residents in a Neighborhood