In the diagram below, assume that there are two classes of citizens, the "hawks and the "doves," with different preferences for national defense spending. Assume each group has 50 million households and the lines WTPD and WTPH give the aggregate marginal willingness-to -pay for national defense for each group. Assume that MC measures the marginal cost of reducing the probability that an enemy could land a missile on U.S. soil or otherwise threatenthe lives of US non-combatants by chemical attack or conventional warfare.
a) Draw the social marginal benefit curve for society as a whole.
b) Determine the theoretical optimum level of national defense to provide.
c) In theory, what payment scheme would generate general voter satisfaction with this level of National defense spending?
d) Why in practice will no one reveal their preference if the payment scheme in (c) is adopted.
e) Why will both hawks and doves be unhappy with the level of national defense chosen if defense spending is financed by an income tax, even if the theoretical optimum amount of national defense is chosen?