Question

Persons 1, 2, and 3 have demands for public good X as: X1 = 40 – 2P1; X2 = 140 – P2; X3 = 80 – P3. (Assume the demand functions have only positive values.) The marginal cost of supplying the public good is constant at MC = 70. a. What distinguishes a private good from a public good? b. Find the efficient quantity of the public good, X. (Think about the following. First, do you sum vertically or horizontally to find the total/aggregate demand (social marginal benefit) of the public good? What is the difference and which variable (P or X) should be on the left-hand side of the equation if you sum vertically/horizontally? Why? Refer to pages 613-614 in the text.) c. Find each person’s marginal willingness to pay per unit of X at the socially efficient level of X. d. Explain whether the private market will provide the efficient level at X at the efficient set of prices.

Answer 1

Answer-a

Public goods – well private company works for his profit as well as just like what they wants ,’’ that’s why private company sells their goods where price is more than its marginal cost

Public goods – public sector company earn zero profit by selling their goods at the price of marginal cost

Answer-b

Public sector goods will be available at marginal cost

Price of goods for all person will be P1 = P2 = P3 = 70.

X1 = 40 – 2P1 => X1= - 100 (for market actual will be x1>=0, so x1=0)

X2 = 140 – P2 => X2=70

X3 = 80 – P3 => X3 =10

Aggregate demand = 0+70+10=80

Answer-c

Wiliness to pay for first unit of goods x1=x2=x3=1

P1= 19.5 , P2=139, P3=79

Answer-D

at the price of efficient level total demand is 80 unit in an competitive market as well non -competitive market.