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Questions › DSE › DSE 2015 › Q27
2 marks, −0.666666666666667Microeconomics › Market failure, externalities and public goods › Free riding and preference revelationHardabout 4 min

DSE 2015 Question 27: Market failure, externalities and public goods

A government and two citizens: a park costs Rs 100100100; its value is Rs 303030 to citizen 111 and Rs 606060 to citizen 222 (private). Each reports r1,r2r_1,r_2r1​,r2​; the park is built iff r1+r2≥100r_1+r_2\ge100r1​+r2​≥100, in which case citizen 111 pays 100−r2100-r_2100−r2​ and citizen 222 pays 100−r1100-r_1100−r1​ (no taxes if not built). The reported valuations will be

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A government and two citizens: a park costs Rs 100; its value is Rs 30 to citizen 1 and Rs 60 to citizen 2 (private). Each reports r₁,r₂; the park is built iff r₁+r₂≥100, in which case citizen 1 pays 100-r₂ and citizen 2 pays 100-r₁ (no taxes if not built). The reported valuations will be (A) r₁<30 and r₂>60 (B) r₁>30 and r₂<60 (C) r₁=60 and r₂=30 (D) r₁=30 and r₂=60

Also written as: A government and two citizens: a park costs Rs 100; its value is Rs 30 to citizen 1 and Rs 60 to citizen 2 (private). Each reports r_1,r_2; the park is built iff r_1+r_2>=100, in which case citizen 1 pays 100-r_2 and citizen 2 pays 100-r_1 (no taxes if not built). The reported valuations will be

Market failure, externalities and public goods has come up 114 times in 7 exams since 2006.

What this question tests

This question is on Free riding and preference revelation, part of Market failure, externalities and public goods in Microeconomics.

Why people understate their value for public goods, and mechanisms that elicit the truth.

TestStop has 9 past-paper questions on this subtopic.

Practise Market failure, externalities and public goodsMore on Free riding and preference revelation

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Question from the DSE 2015 paper. Solutions are TestStop's own. Not affiliated with or endorsed by any examination authority.