Question

Explain carefully why the demand curve for a public good is correctly found by taking the vertical summation of the individual consumers’ demand curves, and why the efficient quantity frequently won’t be produced when left up to the free market (with no government intervention). Use one or more appropriate diagrams to illustrate your answer.

Answer 1

Market demand curve for a public good is the vertical summation of the individual consumers' demand curves.It shows the price which the society is willing to pay for a given quantity of a public good and it is equal to marginal benefit curve.The market demand curve or marginal benefit curve is downward sloping due to the law of diminishing marginal utility.

Since public goods are non-excludable,it is not possible to exclude people or charge them for using it which leads to under- provision of public goods and thus causes market failure.This is called free-rider problem because of which efficient or optimal quantity won't be produced without government intervention.This problem arises because people know that even while not paying or under paying for a public good,they can still get access to it.Generally,the government supplies the public goods because they are non-excludable,so people cannot be excluded from using them once they are provided,thus private suppliers cannot correctly access who all are actually using it and therefore cannot earn profit by providing them.The optimal quantity of public good to be provided is where society's marginal benefit equals provider's marginal cost (MB =MC).