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    Groves Clark Example

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    Ovidiu Hutuleac
    The government is deciding the number of street lights (n=0,1,2,3) to maximize social benefits. Total benefits are highest for n=2 lights. Under equal costs sharing, individuals report private benefits. The Groves-Clarke mechanism sets taxes for pivotal individuals so there is incentive to report truthfully. Person B must pay a $5 tax as the pivotal voter. Person C pays a $10 tax as the other pivotal voter. The taxes ensure no individual can increase their benefit by misreporting private values.

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    Groves Clark Example

    Uploaded by

    Ovidiu Hutuleac
    303 views10 pages
    The government is deciding the number of street lights (n=0,1,2,3) to maximize social benefits. Total benefits are highest for n=2 lights. Under equal costs sharing, individuals report private benefits. The Groves-Clarke mechanism sets taxes for pivotal individuals so there is incentive to report truthfully. Person B must pay a $5 tax as the pivotal voter. Person C pays a $10 tax as the other pivotal voter. The taxes ensure no individual can increase their benefit by misreporting private values.

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    The government is deciding the number of street lights (n=0,1,2,3) to maximize social benefits. Total benefits are highest for n=2 lights. Under equal costs sharing, individuals report private benefits. The Groves-Clarke mechanism sets taxes for pivotal individuals so there is incentive to report truthfully. Person B must pay a $5 tax as the pivotal voter. Person C pays a $10 tax as the other pivotal voter. The taxes ensure no individual can increase their benefit by misreporting private values.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    303 views10 pages

    Groves Clark Example

    Uploaded by

    Ovidiu Hutuleac
    The government is deciding the number of street lights (n=0,1,2,3) to maximize social benefits. Total benefits are highest for n=2 lights. Under equal costs sharing, individuals report private benefits. The Groves-Clarke mechanism sets taxes for pivotal individuals so there is incentive to report truthfully. Person B must pay a $5 tax as the pivotal voter. Person C pays a $10 tax as the other pivotal voter. The taxes ensure no individual can increase their benefit by misreporting private values.

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    An Example

    The government is deciding on number of street lights to be installed.

    Three beneficiaries - A, B, C.

    Four alternatives: n = 0, 1, 2, 3 where n is the number of street lights.

    The government’s objective to install the socially efficient number of


    street lights.

    () Groves-Clarke Mechanism: An Example December 4, 2008 1 / 10


    Total benefits and costs

    As social net benefit is maximum at 2, that is the socially efficient


    number.
    () Groves-Clarke Mechanism: An Example December 4, 2008 2 / 10
    Net benefits with equal cost share

    If n = 1, the total cost is 120. Hence, cost share for each is 40. The
    private net benefit for A is then 60 − 40 = 20. Similarly for B and C
    and n = 2, 3.
    () Groves-Clarke Mechanism: An Example December 4, 2008 3 / 10
    Groves Clarke Taxes

    Person A

    Person A is not pivotal. Without him, the net benefit is maximum at


    n = 2. With him the net benefit is maximum at n = 2. So his tax is
    zero.

    () Groves-Clarke Mechanism: An Example December 4, 2008 4 / 10


    Person B

    Person B however is pivotal. With him the net benefit is maximum at


    n = 2. Without him the net benefit is maximum at n = 3.
    B’s tax is therefore the difference between the sum of net benefits of
    others at n = 3 and the sum of net benefits of others at n = 2, i.e.
    135 − 130 = 5.
    B is paying the tax bacause his report changes the decision from
    n = 3 to n = 2.
    () Groves-Clarke Mechanism: An Example December 4, 2008 5 / 10
    Person C

    Person C is pivotal as well. With him the net benefit is maximum at


    n = 2. Without him the net benefit is maximum at n = 1
    C’s tax is therefore the sum of others’ benefits at n = 1 and the sum
    of others’ benefits at n = 2, i.e. 60 − 50 = 10.

    () Groves-Clarke Mechanism: An Example December 4, 2008 6 / 10


    Net benefits with taxes

    Post tax net benefit from this scheme: 10 for A, 40 − 5 = 35 for B,


    120 − 10 = 110 for C .

    () Groves-Clarke Mechanism: An Example December 4, 2008 7 / 10


    Incentives for truthful revelation

    Notice that A’s net benefit is maximum at n = 3. Does he have an


    incentive to lie and change the decision to n = 3?
    Suppose A states his net benefit from n = 3 to be 70 instead of 35.
    Then, sum of stated net benefits is maximum at n = 3.

    () Groves-Clarke Mechanism: An Example December 4, 2008 8 / 10


    Incentives for truthful revelation

    But then A becomes pivotal. Without him the sum of net benefits is
    maximum at n = 2. His report changes the decision from n = 2 to
    n = 3.
    So he has to pay a tax and his tax will be equal to 160 − 120 = 40.

    () Groves-Clarke Mechanism: An Example December 4, 2008 9 / 10


    Incentives for truthful revelation

    A’s net benefit from lying will be

    (Net benefit from n = 3) − Tax


    = 35 − 40
    = −5

    A’s net benefit from truthfully reporting is 10.

    Hence A doesn’t have incentive to lie.

    You can repeat the same exercise for B and C to verify that they do
    not have incentive to lie either.

    () Groves-Clarke Mechanism: An Example December 4, 2008 10 / 10

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