Question

Explain how cost-benefit analysis is used to determine the optimal quantity of a public good. Identify...

Explain how cost-benefit analysis is used to determine the optimal quantity of a public good.

Identify the purpose of cost-benefit analysis and explain the major difficulty in applying this analysis.

Explain what is meant by externalities or spillovers.

Explain the Coase theorem, its significance, and the three conditions necessary for it to work.

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Answer #1

Like any other economic principle, the purpose of cost-benefit analysis is to determine whether the cost outweighs the benefits of a service (effective production). If the costs are greater, then the good or service will not be provided. If the product is public you are taking money away from the private sector which has a direct impact on the strength of the economy as well as risking the “Free-rider” Problem. This causes consumers not having to pay and reap the benefits, thus also causing a loss of profit by the provider. 3. Explain what is meant by externalities or spillovers. Externalities (spill overs) occur when some of the costs or benefits of a good or service is passed onto someone other than the immediate buyer/seller (a third party).

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