16.18 : The Optimal Level of Public Goods

Public goods are services or commodities that are non-rival, meaning all members of society can consume the good without diminishing the quality or availability of the good to anyone. Public goods also have the characteristic of non-excludability, where it is not economically feasible for private firms to exclude non-paying consumers of the goods.

This combination of nonrivalry and non-excludability prevents the private sector from providing the socially optimal level of public goods. As a result, the government can use its ability to collect payment from all potential consumers (via taxes) to provide public goods at socially optimal quantities. Examples include national defense, public parks, and street lighting. However, the challenge is to determine the socially optimal quantity of a public good to provide.

Marginal Benefit and Marginal Cost

1. Marginal benefit refers to the additional satisfaction or utility an individual receives from consuming one more unit of a good or service. For public goods, different individuals may place different values on the good. For example, some people may value a public park highly, while others may value clean air relatively more.
2. Marginal cost is the expense incurred by the government or provider to produce one additional unit of the public good. This could include costs of construction, maintenance, or other related expenses.

Total Marginal Benefit

The total marginal benefit is the sum of the individual marginal benefits received by all members of society. Since public goods are non-rivalrous, meaning one person's use does not reduce availability for others, the combined benefit represents the value society places on the good as a whole.

Finding the Efficient Quantity

The efficient quantity of a public good is found where the total marginal benefit equals the marginal cost. This is the point at which the additional cost of providing one more unit is balanced by the benefit it provides to society.

Private Market and Underprovision

In a private market, individuals would only be willing to pay up to the point where their personal marginal benefit equals the marginal cost. As a result, the quantity provided would be less than the efficient level, leading to underprovision of the public good. This is why governments step in to supply public goods, ensuring they are available at socially optimal levels.