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28 August, 15:42

National defense is a good that is nonexcludable and nonrival in consumption. Suppose that instead of national defense being paid for with tax dollars national defense is paid for by voluntary contributions from (potentially) all individuals within Latvia. Ernest, who is a Latvian citizen, must decide whether he wants to contribute to the national defense budget. Further, suppose that there are a total of 10 citizens, including Ernest. For the optimal amount of safety, each citizen should pay $ 10. Every $ 1 contributed (by anyone) to the national defense leads to increased security, which each person values at $ 0.30. This means that every dollar spent on defense is worth $ 3.00 to Latvia as a whole. How much does Ernest personally value the increase in national defense when he contributes $ 10 to the defense fund?

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  1. 28 August, 17:27
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    It is given that each person values the increase at $0.30

    This means that when Ernest contributes $10 to the defense fund, his valuation is 10*0.03 = 3$
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