Multiple Choice
Which of the following best explains why government agencies are often responsible for managing public goods on behalf of the people?
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8. The Types of Goods
Public Goods: Demand Curve and Optimal Quantity
Multiple Choice
When economic benefits are distributed uniformly across society, which of the following best describes the optimal quantity of a public good?
A
It is determined by the average marginal benefit of all individuals equated to the marginal cost.
B
It is determined by the marginal benefit of the poorest individual equated to the marginal cost.
C
It is determined by the sum of all individuals' marginal benefits equated to the marginal cost.
D
It is determined by the marginal benefit of the wealthiest individual equated to the marginal cost.
Verified step by step guidance1
Step 1: Understand the nature of public goods. Public goods are non-excludable and non-rivalrous, meaning one person's consumption does not reduce availability to others, and no one can be excluded from using them.
Step 2: Recognize that the optimal quantity of a public good is found where the total social benefit equals the social cost. Since the good is shared, we consider the combined benefits of all individuals.
Step 3: Define the marginal benefit for each individual as the additional benefit they receive from one more unit of the public good. Because the good is shared, these benefits add up across all individuals.
Step 4: Express the condition for optimal provision of the public good as the sum of all individuals' marginal benefits equaling the marginal cost of providing the good. Mathematically, this is: \(\sum_{i=1}^n MB_i = MC\) where \(MB_i\) is the marginal benefit for individual \(i\) and \(MC\) is the marginal cost.
Step 5: Conclude that the optimal quantity is not based on any single individual's marginal benefit (poorest or wealthiest), nor on the average marginal benefit, but on the sum of all individuals' marginal benefits equated to the marginal cost.
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