Question

Explain what determines the "optimal" amount of a public good and how this concept of optimality can change over time (as we elect new and different leaders). If you use any other sources, be sure to cite them within the text as well as provide a bibliographical citation at the end. Provide one "unique" (i.e. don't use one that a classmate has already used!) example of the free rider problem that you have seen in your lives. From this example, identify what is causing the market failure and a possible way to solve this problem.u

Answer 1

The Optimal amount of Public good is determined by the demand and supply i.e. the Marginal Benefit (MB) and Marginal Cost (MC) of a Public good. MB is the benefit received to the public from the use of that public good and MC is the cost incurred by the government in order to make that particular good available. So the optimal amount of public good is the point of intersection of the MB and MC curves. The government uses this Cost-Benefit analysis to decide whether to provide that particular good or not and if yes than in what quantity.

This concept of optamility can change over time because when the new leaders are elected, they again perform the cost-benefit analysis according to their belief. The benefit received from a public good may be different for different people. As a particular good may be useful for someone and useless for some other. So if cost benefit analysis is performed again with different mindset than the total cost or total benefit may be changed and hence the optimal amount of public good may change. Different leaders may bring different types of projects whose cost also differ.

An example of a free rider problem may be a public garden with lots of trees in it, which is maintained by government( from the tax of the general people) if someone enters he has to pay an entry fee. But assume a person who lives beside the garden, he never enters the harden so he pays no fee, but since he lives there day and night he gets fresh oxygen free of cost. He doesn't pay for it but gets benefit. This is called free rider problem.

This free rider problem is causing market failure because there is inefficient provision of public good. Here there are some persons who are paying for it ( in form of tax) but are not using it, and some are not paying for it but are using it. This market failure problem can be solved by government, the government should impose a nominal amount of money as a tax or contribution for the maintenance of the trees in the garden.