Economic Policy, Problem 2-5, Exercise sheet 2: Decision-Making Mechanisms

Consider the same economy described in the problem 2-4. Now, assume that individual i’s preferences are given by w c V(g) i i i = +α , where V(g) is a concave and increasing function and i α is the type-specific parameter of agent i drawn from distribution D(⋅) with a mean α . All individuals have the same initial endowment, normalized to unity. To finance the public good production, the government raises a tax t on each individual. Answer the questions a) – c) for this economy.