Multiple Choice
A consumption tax is often used to pay for things everyone gets to enjoy, such as which of the following?
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8. The Types of Goods
Public Goods: Demand Curve and Optimal Quantity
Multiple Choice
Why does the government provide national defense as a public good, and how is the optimal quantity of national defense determined?
A
Because national defense is non-excludable and non-rivalrous, the government provides it, and the optimal quantity is where the sum of individual marginal benefits equals the marginal cost.
B
Because national defense is excludable and rivalrous, the government provides it, and the optimal quantity is where individual demand equals supply.
C
Because national defense is a private good, the government provides it, and the optimal quantity is determined by market equilibrium.
D
Because national defense is non-excludable but rivalrous, the government provides it, and the optimal quantity is where the average benefit equals the marginal cost.
Verified step by step guidance1
Understand the characteristics of national defense as a public good: it is non-excludable (people cannot be prevented from benefiting) and non-rivalrous (one person's consumption does not reduce availability to others).
Recognize that because of these characteristics, private markets tend to underprovide national defense since individuals may free-ride, benefiting without paying.
Identify that the government steps in to provide national defense to ensure an adequate level of this good is available to all citizens.
Determine the optimal quantity of national defense by equating the sum of all individuals' marginal benefits (the total willingness to pay) to the marginal cost of providing an additional unit of defense.
Formally, this condition can be expressed as: \(\sum_{i=1}^n MB_i = MC\), where \(MB_i\) is the marginal benefit to individual \(i\), and \(MC\) is the marginal cost of national defense.
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