Econ Micro (book Only)
6th Edition
ISBN: 9781337408066
Author: William A. McEachern
Publisher: Cengage Learning
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Textbook Question
Chapter 16, Problem 1P
(Optimal Provision of Public Goods) Using at least two individual consumers, show how the market
Expert Solution & Answer
To determine
the market demand curve is to be derived from individual demand curves for a private goods and for a public good and then introduce the market supply curve and show the optimal level of production.
Concept Introduction:
A demand curve is a graph that shows the change in quantity demanded of a good or service with respect to its price. With change in price the demand also change and it carries an inverse relationship with the price. Market demand refers to the demand of a good in a particular market that adds up to a sum of different individual demands.
Explanation of Solution
Individual demand curves adds up to make a market demand curve for a good. It is a broader term that defines demand of a particular good at a much larger scale.
a. For a private good: Private good refers to the good that needs to be purchased from the private individual and its consumption by one individual prevents it to be consumed from the other individuals.
In the above figure there are three curves, where curve 1 is the individual demand curve for a good at price $5 and quantity 5 units. The second curve represents the individual demand curve for the same good at same price but the quantity is 2. The third curve is the market demand curve which is the summation of curve 1 of individual 1 and curve 2 of individual 2 at price $5 same as before. The market demand curve is the summation of curve 1 and curve 2 therefore the quantity for the same is 5 + 2 = 7 units.
b. For public good: A public good is a good which is provided to all the members of the society without profit, it is provided by the government, individual or an organization. The consumption of such good doesn’t affect the consumption for others.
Public good once produced is available to all people and in identical amounts. Hence the demand for the public good is the vertical summation of each individuals demand. The marginal cost here equals the marginal benefits at e where the market demand curve and the marginal cost curve are at equilibrium. The red line on the graph represent the market demand curve and the blue line defines the marginal cost curve. Dm and Da are respectively the two individual demand curves which add up vertically with quantity being constant to make the market demand curve.
The market supply curve is an upward sloping curve which shows a positive relationship between the price and the quantity supplied. The summation of the individuals producers supply makes the market supply curve.
The optimal level of production is the point where the market demand is equal to that of the market supply and that level of intersection is called the market demand.
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Students have asked these similar questions
Question 3
Some reasons why resources could be allocated inefficiently by the market are negative
externalities and positive externalities.
(a) Explain, using graphs, what the problem is in each case, and explain possible solutions to
each problem.
(b) All of these problems might be described as arising due to poorly defined property rights.
Explain the relationship of property rights to these instances where the market fails to
allocate resources efficiently.
(c) Explain how a corrective tax can eliminate the inefficiency caused by a negative
externality. Use a graph to assist your explanation
(d) Why does the optimal tax promote the efficient use of resources?
4. Cost-benefit analysis
A local college is deciding whether to conduct a campus beautification initiative that would involve various projects, such as planting trees and
remodeling buildings, to make the campus more aesthetically pleasing.
For the students of the college, the visual appearance of the campus is
be classified as a public good.
The benefit of the beautification initiative, as suggested by the survey, is $
cost, the college administrators
and
Suppose the college administrators estimate that the beautification initiative will cost $8,000. To decide whether the initiative should be undertaken,
administrators conduct a survey of the college's 370 students, asking each of them their willingness to pay for the beautification project. The average
willingness to pay, as revealed by the survey, is $16.
▼ undertake the beautification initiative.
. Thus, the visual appearance would
Because the estimated benefit is
An equal number of male and female students were surveyed.
The…
4. Cost-benefit analysis
A local college is deciding whether to conduct a campus beautification initiative that would involve various projects, such as planting trees and remodeling buildings, to make the campus more aesthetically pleasing.
For the students of the college, the visual appearance of the campus is and . Thus, the visual appearance would be classified as a public good.
Suppose the college administrators estimate that the beautification initiative will cost $92,800. To decide whether the initiative should be undertaken, administrators conduct a survey of the college's 2,250 students, asking each of them their willingness to pay for the beautification project. The average willingness to pay, as revealed by the survey, is $28.
The benefit of the beautification initiative, as suggested by the survey, is
. Because the estimated benefit is than the cost, the college administrators undertake the beautification initiative.
The calculation of the…
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