Cindy and Dan share a public good G. Cindy’s preferences are Uc = xc + 2G1/2, and she has income mc. Dan has preferences Ud = xd + 8G1/2, and he has income md. Both x and G have a price of 1.
a. What is the Pareto efficient level of G?
b. Dan suggests they finance the Pareto efficient level of G by each paying half the cost. Would Cindy agree to this? That is, is Dan’s suggestion a Pareto improvement over having G=0?
c. Instead Cindy would implement the Lindahl solution. What share of the Pareto efficient level of G would Cindy pay under this solution?