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Marginal cost and snowplowing

Public Goods
Thelma and Louise are neighbors. During the winter, it is impossible for a snowplow to clear the street in front of Thelmaâ??s house without clearing the front of Louiseâ??s. Thelmaâ??s marginal benefit from snowplowing services is 12-Z, where Z is the number of times the street is plowed. Louiseâ??s marginal benefit is 8-2Z. The marginal cost of getting the street plowed is $16.

Sketch the two marginal benefit schedules and the aggregate marginal benefit schedule. Draw in the marginal cost schedule, and find the efficient level of provision for snowplowing services. If Thelma and Louise can come to an agreement that allows for the efficient level of provision of the snowplowing services, what are three possible ways in which they can share the costs? If Thelma and Louise cannot come to an agreement, how many times will the street be plowed?

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To find the amount that a group would pay for a public good, we sum their demand curves vertically. This is done because the good must be consumed in equal amounts, unlike a private good. Vertical summation of 12 -Z and 8-2Z gives us the MSB curve shown on the attached file. At $16, the MSC, we find that this curve is ...

Solution Summary

Efficient level of snowplowing determined by marginal costs and benefits