Question

1.  Imagine that there is a public good that will be simultaneously consumed by a number of people and that the marginal cost of providing a unit of this public good is $300,000. Each person has the following marginal value schedule for this good:

Q   MV

1   $31

2   $28

3   $25

4   $22

5   $19

6   $16

7   $13

8   $10

9   $  7

A. What is the optimal number of units to provide if the population is 10,000?

B. What is the optimal number of units to provide if the population is 30,000?

C.  What will be the optimal numbers in parts A and B if the marginal cost is cut in half?

D. Does the efficient level of provision depend on how funds are raised to pay for provision of this public good? Explain why or why not.

E.  In general, how does the optimal provision of a public good change as the population increases? Why?

Answer 1