Answer Happy

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The government of Khatmal is concerned that there is a market failure in the provision of road cleaning services and is considering a public provision option financed by taxes on R and P. However, the tax collector is unable to distinguish between R and P as it is each for R to disguise as P. Hence, the government is restricted to taxing everyone the same amount to finance the cleaning. I.e., if m units of cleaning are provided, everyone is charged m/2 in taxes. c. What amount of daily cleaning should the government provide to maximize social surplus (assume the government maximizes the sum of the utilities of R and P)? What would be the resulting utility of R and P under this level of provision? Discuss any differences from the utilities in part b above, and also comment on any changes in social surplus. d. Does the sum of the individuals' marginal rates of substitution equal the price ratio? Why do you think? e. Now suppose that it is possible to distinguish between R and P, thus allowing differential taxation. Now how much of m does the government provide, and how is the tax burden divided? Calculate the sum of the individuals' marginal rates of substitution, and compare with part d above. Also calculate resulting individual and social surplus.