Question

With the aid of a diagram, discuss market equilibrium for a public good in a hypothetical economy with two individuals who consume that public good assuming those individuals reveal their preference for that public good

Answer 1

Public goods are non rival and non excludable in nature; for example, public parks, street light, breathing air etc. There is no individual preference in the consumption of public goods. Individual can easily participate in the public good consumption. The demand curve reveals the preference of both the consumers towards the public good. And the supply determine by the authority. So there is a limited choice to reveal their preference. So with given availability of choices both the consumers reveal their preference. The budget line shows the total income of both the consumers. They will distribute the given budget to get higher level of satisfaction through consuming the public good. There is positive externalities emerged from the production of public goods. The optimal quantity of public god equates marginal benefit and marginal cost. The market demand for public goods shows the willingness to pay for the good by the society.