How does the government establish the best price to charge for public goods? (Public goods are...

How does the government establish the best price to charge for public goods? (Public goods are goods that are supplied by the government)

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Expert Solution

Public goods like street light, national defence, etc. are non-rival and non-excludable.

Non-rival means if it is used by one consumer it could be used by other consumers too simultaneously.

Non-excludable means that the non-paying consumers also are getting benefit out of it. Suppose everybody in the country doesn't pay tax but still they are protected through the national defence.

The market structure of this kind of business is monopoly. Here the demand curve is downward slopping from left to right. Marginal revenue (MR) is also slopped downward but faster than the demand curve. Marginal cost (MC) curve is slopped upward and it cuts both MR curve and demand curve one after another. In this way equilibrium is established where (MR = MC). The government should try to stay in this equilibrium where the corresponding price is the best price.

Rahul Sunny answered 1 year ago

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