Efficient Production Levels of Public Goods
| This article is written like a personal reflection or essay rather than an encyclopedic description of the subject. Please help improve it by rewriting it in an encyclopedic style. |
| This section requires expansion. |
A public good is provided efficiently at the level where the combined marginal rate of substitution of all individuals is equal to the marginal rate of transformation. (The marginal rate of substitution is the rate at which an individual is willing to exchange a private good for a public good, the marginal rate of transformation is the quantity of a private good which the society has to give up in order to produce one unit of a public good).
When should a public good be provided? To illustrate the basic principle, consider a community composed of just two consumers. The government is considering whether or not to provide a park. Arthur is prepared to pay up to $200 for use of the park, while Julia is willing to pay up to $100. The total value to the two individuals of having the park is $300. If it can be produced for $225, there is a $75 gain on its production since it provides services that the community values at $300 at a cost of only $225.
Regardless of the method of providing public goods, the efficient level of such provision is still being subjected to economic analysis. For instance, the Samuelson condition calculates the efficient level of public goods production to be where the ratio of the marginal social cost of public and private goods production equals the ratio of the marginal social benefit of public and private goods production.
"If the amount of a public good can be varied continuously, the optimal quantity to produce is that quantity for which the marginal cost of the last unit is just equal to the sum of the prices that all consumers would be willing to pay for that unit." This equilibrium guarantees that the last unit of the public good costs as much to produce as the value that it gives to all of its consumers.
Read more about this topic: Public Good
Famous quotes containing the words efficient, production, levels, public and/or goods:
“As machines become more and more efficient and perfect, so it will become clear that imperfection is the greatness of man.”
—Ernst Fischer (1899–1972)
“Perestroika basically is creating material incentives for the individual. Some of the comrades deny that, but I can’t see it any other way. In that sense human nature kinda goes backwards. It’s a step backwards. You have to realize the people weren’t quite ready for a socialist production system.”
—Gus Hall (b. 1910)
“The word which gives the key to the national vice is waste. And people who are wasteful are not wise, neither can they remain young and vigorous. In order to transmute energy to higher and more subtle levels one must first conserve it.”
—Henry Miller (1891–1980)
“Twenty years of romance makes a woman look like a ruin; but twenty years of marriage makes her look like a public building.”
—Oscar Wilde (1854–1900)
“This avidity alone, of acquiring goods and possessions for ourselves and our nearest friends, is insatiable, perpetual, universal, and directly destructive of society.”
—David Hume (1711–1776)