The values in the table represent the marginal benefit to each person for units
ID: 1214790 • Letter: T
Question
The values in the table represent the marginal benefit to each person for units of a public good. Suppose that the public good can be produced at a constant marginal cost of $11 per unit. If left to the private market, how many units of the public good will be produced? What is the socially optimal number of units of this public good? Intuitively explain the " free-rider " problem and how it relates to this question - be sure to discuss the concepts of non-rivalry and non-excludability. Calculate the surplus foregone if the market were left unregulated? Describe one policy that could be used to increase provision of this public good.Explanation / Answer
a)
a) Private firm will equate each person's Marginal benefit = marginal cost so it would charge $11 from each of them. In this way Jim John and Roger will not buy any unit, Bob buys 2 unit and Garry buys three units.
In case of a public good, same quantity of public good is provided to each consumer and they pay a price according to their demand schedule. The socially efficient level of public good occurs at a point where the marginal cost of producing it equals the total demand for it or the summation of all the marginal benefits curve so that MC = SMB. This does not occur in this table since SMB continues to be greater than MC. So for this data, the socially efficient level is 8 units of public good
b) In provision of public goods there is a tendency not reveal one's true valuation. People believe that if the good is provided, they are going to use it anyway so they wish others to pay for it. But when everyone refuses and thus are willing to pass this cost on other and not willing to voluntarily pay what it is worth, the good will not be provided. Enjoying the benefit of a good without paying for it is called free riding.
A public good is an entity that provides benefits to all individuals simultaneously and whose enjoyment by one person in no way diminishes that of other. The former feature is known as non-rivalry and the latter is referred to as non-excludability in consumption. A private good on the other hand is privately owned and used when the owner purchases it.
c) Consumer surplus is the area of the portion above the price line and below the demand curve. In the table we saw that the market has a surplus of 169 when socially optimum level is provided. Privately, the surplus earned by Bob is $1 and by Gary is $9 (5 + 3 + 1) So a surplus of $159 is gone.
d) One method is to supply it by the government and a tax is charged.
Jim's MB John's MB Bob's MB Roger's MB Gary's MB SMB MC Consumer Surplus 1st unit 6 10 12 9 16 53 11 42 2nd unit 5 9 11 8 14 47 11 36 3rd unit 4 8 10 7 12 41 11 30 4th unit 3 7 9 6 10 35 11 24 5th unit 2 6 8 5 8 29 11 18 6th unit 1 5 7 4 6 23 11 12 7th unit 0 4 6 3 4 17 11 6 8th unit 0 3 5 2 2 12 11 1 Total 169Related Questions
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