Question

1) A public good is described, in part, as a good

A) that has a marginal cost at or near zero.

B) that is essential to life.

C) which has all of these characteristics.

D) that may be depleted if demand is heavy.

2) The optimal output of a public good occurs where

A) the marginal benefit of the consumer who values the good most should equal the marginal cost of the good.

B) the sum of the marginal benefit of each consumer at a given output equals the marginal cost of the good.

C) the total cost of the good equals the cumulated benefits of all consumers.

D) the horizontal sum of the consumer benefits of the good should equal the marginal cost of producing the good.

3) Which is not a good method of providing public type goods by private means?

A) Private contracts

B) Clubs

C) Free markets with competing entrepreneurs

C) Funding by donation

Please answer all of the questions

Answer 1

1.C. A public good is a product that one individual can consume without reducing its availability to another individual, and from which no one is excluded. It is referred to as public goods as "nonrivalrous" and "nonexcludable." National defense, sewer systems, public parks and other basic societal goods can all be considered public goods.

2.A. The government is providing an efficient quantity of a public good when its marginal benefit equals its marginal cost.

Key Points

• Collective demand for a public good is the vertical summation of individual demand curves. It shows the price society is willing to pay for a given quantity of a public good.
• The demand curve for a public good is downward sloping, due to the law of diminishing marginal utility. The supply curve is upward sloping, due to the law of diminishing returns.
• The optimal quantity of a public good occurs where the demand ( marginal benefit ) curve intersects the supply ( marginal cost ) curve.
• The government uses cost-benefit analysis to decide whether to provide a particular good. If MB is greater than MC there is an underallocation of a public good. If MC is greater than MB there is an overallocation of a public good. When MC = MB then there is an optimal allocation of public goods.

Key Terms

• Cost-benefit analysis: A systematic process for calculating and comparing the marginal benefits and marginal costs of a project or activity.

To determine the optimal quantity of a public good, it is necessary to first determine the demand for it. Demand for public goods is represented through price-quantity schedules, which show the price someone is willing to pay for the extra unit of each possible quantity. Unlike the market demand curve for private goods, where individual demand curves are summed horizontally, individual demand curves for public goods are summed vertically to get the market demand curve. As a result, the market demand curve for public goods gives the price society is willing to pay for a given quantity. It is equal to the marginal benefit curve. Due to the law of diminishing marginal utility, the demand curve is downward sloping.

Often, the government supplies the public good. The supply curve for a public good is equal to its marginal cost curve. Because of the law of diminishing returns, the marginal cost increases as the quantity of the good produced increases. The supply curve therefore has an upward slope.

As already noted, the demand curve is equal to the marginal benefit curve, while the supply curve is equal to the marginal cost curve. The optimal quantity of the public good occurs where MB (society’s marginal benefit) equals MC (provider’s marginal cost), or where the two curves intersect. When MB = MC, resources have been allocated efficiently.

The public good provider uses cost-benefit analysis to decide whether to provide a particular good by comparing marginal costs and marginal benefits. Cost-benefit analysis can also help the provider decide the extent to which a project should be pursued. Output activity should be increased as long as the marginal benefit exceeds the marginal cost. An activity should not be pursued when the marginal benefit is less than the marginal cost. An activity should be stopped at the point where MB equals MC. This is the MC=MB rule, by which the provider of the public good can determine which plan, will give society maximum net benefit.

3.A