Use the following to answer questions :
Scenario: Private and External Benefits
A small community finds that tidy lawns and neighbourhoods provide both private and external benefits.They determine that the marginal private benefit (MPB)of lawns can be represented by the equation MPB = 50 - 0.5Q,where Q is the number of hours spent on keeping lawns tidy.The marginal private cost (MPC)of such lawn upkeep is represented by the equation MPC = 0.5Q,where Q is again the number of hours engaged in lawn upkeep.
-(Scenario: Private and External Benefits)Use Scenario: Private and External Benefits.The community decides that the marginal benefit to external parties from lawn upkeep is $15 and that it is important to maintain the socially optimal number of lawn upkeep hours.To achieve this goal,the community will:
A) require community lawn service of 45 hours.
B) subsidize everyone who contributes to lawn upkeep with a payment of $15.
C) implement a Pigouvian lawn tax of $65.
D) provide no additional funds to lawn upkeep.

Question

Quizplus · Accepted Answer

To achieve the socially optimal number of lawn upkeep hours, the community needs to account for the external benefit provided by tidy lawns. One way to do this is to subsidize everyone who contributes to lawn upkeep with a payment of $15. This will increase the marginal benefit (MPB) of lawn upkeep and encourage people to spend more time on it. Since the marginal private benefit (MPB) equation is MPB = 50 - 0.5Q and the external benefit is $15, the total marginal benefit (MB) is MB = MPB + External benefit = 50 - 0.5Q + 15 = 65 - 0.5Q. To achieve the socially optimal number of lawn upkeep hours, the community should set the marginal cost (MC) equal to the total marginal benefit (MB), which gives: MC = 0.5Q = 65 - 0.5Q, or Q = 45. Hence, each person who contributes to lawn upkeep should be subsidized with $15 to cover the external benefit and encourage them to spend a total of 45 hours on lawn upkeep.

Use the Following to Answer Questions