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Three beneficiaries - A, B, C.
Four alternatives: n = 0, 1, 2, 3 where n is the number of street lights.
The governments objective to install the socially efficient number of
street lights.
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If n = 1, the total cost is 120. Hence, cost share for each is 40. The
private net benefit for A is then 60 40 = 20. Similarly for B and C
and n = 2, 3.
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Person B
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5 / 10
Person C
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6 / 10
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But then A becomes pivotal. Without him the sum of net benefits is
maximum at n = 2. His report changes the decision from n = 2 to
n = 3.
So he has to pay a tax and his tax will be equal to 160 120 = 40.
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December 4, 2008
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