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Yuqing Meng December 6, 2010

Modeling Project 3

1. Only individuals provide the public good. Thus, the individual’s utility maximizing function
is of the quasilinear form
Ui = Xi + αv(ci + E) − ci
where Xi is the income of person i, α is the taste preferences of the person and is distributed
between 0 and A, ci is the contribution of person i, and E is the contribution of every one else.
This utility maximizing function is linear in income. The person gains addition utility from
his own contribution and that of everyone else.

Now we find first-order conditions conditions to find the most optimal ci


δUi
= αv � (ci + E) − 1 = 0
δci
This becomes
1
v � (c1 + E) =
α
The marginal utility of the contributions equals the marginal cost of the contributions.
In order to see who will provide the good, it is best to consider two scenarios. Imagine there
is one person with the highest taste, meaning he has αmax . For person with αmax , his FOC
would like like
1
v”(cmax + E) =
αmax
Let’s compare it with the marginal cost of people i who don’t have the highest taste.
1 1
> .
αi αmax
The higher αmax is, the smaller the marginal cost. Taking this a step further, we see that
1 1
v � (ci + E) = > = v � (cmax + E)
αi αmax
Thus,
v � (ci + E) > v � (cmax + E)
Because utility functions are concave and monotonic, cmax > ci . Because utility functions are
concave and monotonic, the highest taste person will want to reach his optimal which is at
cmax . His optimal utility point is higher than that of everyone else’s. Everyone else will no
longer contribute because they can just free ride on the contribution of the person with the
highest taste because that person would want to reach his optimal anyway. They wouldn’t
need to pay anything to enjoy this benefit. The utilities of the free riders are

Ui = Xi + αv(cmax )

and the utility of the person with the highest taste is

Ui = Xi + αv(cmax ) − cmax

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Yuqing Meng December 6, 2010

Let’s consider another scenario. In this scenario, more than one person have the highest
taste. As shown before, these people with the same highest taste will be the one ones to con-
tribute to the public good. What results is a subgame equilibrium. All the contributors will
end up paying the same thing. If one contributor contributes a higher share to cmax , then he
would want to lower his contribution because the other people are paying lower. In the end,
each person with the same highest taste will contribute
cmax
N
where N is the number of people who have the same highest taste. The utilities of the free
riders are
Ui = Xi + αv(cmax )
and the utilities of the contributors are
cmax
Ui = Xi + αv(cmax ) −
N
2. There are two towns, A and B. Assume that town A has more public good.

c∗a > c∗b

The other scenario where town B has more public good than town A produces the same result
due to symmetry. The people in town B wants to go to town A because they can receive more
public goods. They would be able to eliminate their contribution to town B’s public goods
and free ride on town A’s public good. The person (call it person Q) with the highest taste in
town A goes to town B. Let
∆C = c∗a − c∗b
Person Q’s would still want to gain the most optimal level of public goods which is at the level
of c∗a but in town B, he thus only needs to pay ∆C instead of c∗a As people leave town B, c∗b
decreases so person Q has to pay more and more as ∆C increases. The end result is one big
community with everyone in one town and the highest taste person Q or the people with the
highest tastes will contribute a total of c∗a as the public good. The utilities of the contributors
is
cmax
Ui = Xi + αv(cmax ) −
N
and the utilities of the free riders are

Ui = Xi + αv(cmax )

3. The introduction of the tax requires that we incorporate it into the utility functions of the
individuals. Since people can still move freely between communities, the people with high
tastes will move to one community and the people with low tastes will move to the other
community. Thus, after the election, the high taste community will have a higher tax and a
higher level of public good than the low taste community. The tax is a head tax that is the
same on all members of the community. There is a continuum of voters with a total number of
N and their tastes for public goods are distributed between 0 and A. The tax rate is chosen to
maximize the utility of the community’s median voter according to the media voter theorem.
The median voter in the low taste community is
α∗
2
and the median voter for the high taste community is
A − α∗ A + α∗
α∗ + =
2 2

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Yuqing Meng December 6, 2010

We assume uniform distribution for a. Thus, the size of the low community is
N α∗
A
and the size of the high community is

N (A − α∗ )
A
Let T � be the tax rate in the low community and T ” be the tax rate in the high taste community.
In the low community, the media voter maximizes the utility function
α∗ N α∗ �
Umedian = f( T ) − T�
2 A
Assume that the low community is community B. The size of the public good is
N α∗ �
cb = T
A
Rearranging this, we get
cb A
T� =
N α∗
Plug this back into the utility maximizing function of the median voter in the low community,
we get
α∗ cb A
Umedian = f (cb ) −
2 N α∗
Now we take FOCs
α∗ � ∗ A
f (cb ) =
2 N α∗
Similarly, we do this for the high community A.
A + α∗ � ∗ A
f (ca ) =
2 N α∗
Now, we can implicitly define α∗ as a function of A and N.

α∗ (A, N )

We can then implicitly define c∗a and c∗b in terms of

c∗a (α∗ (A, N ); A, N )

and
c∗b (α∗ (A, N ); A, N )

Now plug the implicitly defined c’s into the FOCs

α∗ � A
f (cb (α∗ (A, N ); A, N )) =
2 N α∗

A+α � A
f (ca (α∗ (A, N ); A, N )) =
2 N α∗
If we had an explicit function, we can then solve for the optimal c∗a (α∗ (A, N ); A, N ) and
c∗b (α∗ (A, N ); A, N ) to determine the level of public goods

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Yuqing Meng December 6, 2010

4. In part B, we assumed that town A had a higher level of public good. People in town B would
benefit if they moved to town A and the highest taste people would move to town B because
they could pay less to reach their optimal level of public good. This occurs if there is no moving
costs. The addition of the moving costs must be incorporated into the utility functions of the.
The size of the moving costs and the incomes of each individual participant are factors that
will determine whether it would be beneficial for the townspeople of both communities to move.

Let’s first consider the people in town B. They will move if the change in utility from moving
from B to A is greater than the utility lost from the moving cost. This utility lost from moving
cost is a function of both the size of the moving cost and the income. The greater the income
of the person in town B, the more willing he will be to shoulder a higher c cost so the utility
lost will be less. They will not move if the utility lost from moving cost is greater than the
utility they gain from the increased level of public goods.

Now consider the people with the highest taste in town A. Originally,they would move to
town B because they would just pay ∆C N where ∆C is the difference between ca and cb and N
is the number of high taste people. They would move if the increase in utility from contributing
less is greater than the utility lost from the moving cost. The utility lost from moving cost is
again a function of the person’s income and the magnitude of the moving cost.

The people with lower tastes in town A would not move. They would lose utility by moving
to B since the level of public goods is lower and they would lose additional utility from moving.

If people do end up moving, the level of public goods would remain the same as the one
that’s reached in part b.

In part C, there is the head tax to consider. We assume again that the utility lost from
moving cost is a function of the magnitude of the fixed moving cost and the income of the
person. People are randomly placed into community A and community B and assume that
community A has a higher level of public good. Consider the people in community B. The
people with high taste for public goods in community B would want to move to community
A where the level of public goods is higher. They would move if the utility of the increased
public goods is greater than the utility lost from the moving cost and the utility lost from
the higher tax rate in community A. The people with lost taste in community B will remain
because they would lose utility from the moving cost and the increase in taxes. They value
lower taxes more than they value a higher level of public goods.

Let’s examine the decision making in community A. The people with high tastes in com-
munity A won’t want to move because they prefer the higher level of public goods and they
would not want to bear the loss of utility from the moving costs and lower level of public
goods. The people with low tastes in community B would want to move since they want a
lower tax. They would move if the utility gained from lower taxes is greater than the utility
lost from the decrease in public goods and the utility lost from moving costs.

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