Question

8. John has been in the habit of mowing Willa's lawn each week for $20. John's opportunity cost is $15, and Willa would be willing to pay $25 to have her lawn mowed. What is the maximum tax the government can impose on lawn mowing without discouraging John and Willa from continuing their mutually beneficial arrangement

Answer 1

Answer: The maximum tax the government should impose on lawn mowing without discouraging either of the party in the mutual benefit is a tax less than $10. That is form $9 to $1

A tax less than $10 is acceptable because the opportunity cost is $15 and the Price Willa can pay willingly is $25. This means that if the government should impose a tax of $9, John will be making a profit of $1 from the business, while Willa won't be discouraged because she pays what she is willing to pay.