Description: In Lab 4 we considered what happens when different people who are trying to make optimal decisions interact with each other. This week we are discussing some particularly interesting situations of this kind in which what is best for the individual is not best for the group. In this lab you will explore two examples of this and consider how the government might intervene to help out.

Instructions: Answer all of the questions below. You may use any books or notes at your disposal, but you should work entirely on your own.

1. Last year you bought a new house in a new development. Since your house (and all of your neighbors' houses) have wood siding, they all ``need'' to be painted. You're trying to decide whether or not you are going to.

   The disadvantage of painting is that it will cost you $1000. The advantage of painting, in general, is that it increases property values. However, in large part, property values are determined by the quality of the neighborhood. Hece, your property values will go up if everybody else paints there houses even if you don't paint your house. Specifically, if you paint and everyone else paint, your property value will increase by $10,000. If you paint and nobody else does, your property value will decrease by $5,000. If nobody paints, your property value will decrease by $5,500. Finally, everybody else paints and you don't, your property value will increase by $9,100.

   Incorporating the cost of painting, this means that your payoff matrix is as follows:

   		Everybody Else's Decision
   		Paint	Don't Paint
   	Paint	9,000	-6,000
   Your Decision
   	Don't Paint	9,100	-5,500

   1. What should you do? Why?

   2. Assuming everybody else's payoff matrix is the same as yours, what should everyone else do?

   3. What is the final outcome? What is ``troubling'' about this outcome?

   4. Suppose you had 5 neighbors, would/should you be willing to pay to have their houses painted? What if you had 10 neighbors? What if you had 15 neighbors?

   5. How might the town help out?

   6. Could you and your neighbors enter into an agreement that would make you better off? How would you ensure that it would be upheld?

   
   

2. In class we discussed a situation where a new road was constructed and this caused everybody's travel time to increase. As a result, it made sense to close the road. Alternatively, one could leave the road open but charge a toll to discourage people from using it. This kind of policy is called ``congestion pricing'' or ``incentive tolling''.

   You have been given the job of designing a congestion pricing program for the following region:

   

   The on-line Congestion Pricing Evaluation Model can be used to evaluate your proposal.

   
   1. Suppose you can charge tolls on any and all roads; what tolls would you impose in an effort to minimize total travel time?

   2. Suppose you can only charge tolls on the highways (i.e., the roads connecting 6-7, 7-1, 9-8, and 8-1); what tolls would you impose in an effort to minimize total travel time?

   
   

---

---

© Princeton University