Alex, Kara, and Susie are the only three people in a community. Alex is willing to pay $40 for the third unit of a public good; Kara is willing to pay $25. If the marginal cost of producing the third unit is $80, what is the minimum amount that Susie must be willing to pay for it to be efficient for government to produce the third unit?

Question

Quizplus · Accepted Answer

For it to be efficient for the government to produce the third unit of a public good, the sum of the willingness to pay by all individuals must at least equal the marginal cost of production. Alex is willing to pay $40, and Kara is willing to pay $25, totaling $65. Since the marginal cost is $80, Susie must be willing to pay at least $15 ($80 - $65) to cover the marginal cost and make the production of the third unit efficient.

Alex, Kara, and Susie Are the Only Three People in a Community