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Figure: Market Failure
-(Figure: Market Failure)Use Figure: Market Failure.Suppose that the supply curve represents the marginal cost of providing streetlights in a neighbourhood where only two people,Ann and Joe,reside.The demand curve represents the marginal benefit that Ann receives from the streetlights.Suppose that Joe's marginal benefit from the streetlights is a constant amount equal to the vertical distance A-C.If Ann is the only person to pay for the streetlights,how many lights will be provided?
A) 0
B) E
C) F
D) G

Question

Use the following to answer questions :
Figure: Market Failure 
-(Figure: Market Failure)Use Figure: Market Failure.Suppose that the supply curve represents the marginal cost of providing streetlights in a neighbourhood where only two people,Ann and Joe,reside.The demand curve represents the marginal benefit that Ann receives from the streetlights.Suppose that Joe's marginal benefit from the streetlights is a constant amount equal to the vertical distance A-C.If Ann is the only person to pay for the streetlights,how many lights will be provided?
A) 0 
B) E 
C) F 
D) G

Quizplus · Accepted Answer

The optimal level of streetlights occurs where the marginal cost (supply curve) equals the marginal benefit (demand curve). At point F, the marginal cost exceeds the marginal benefit, so fewer streetlights should be provided. At point G, the marginal benefit exceeds the marginal cost, so more streetlights should be provided. Therefore, the optimal level of streetlights is at point C, where the supply and demand curves intersect. If only Ann pays for the streetlights, she will choose the optimal level of streetlights that maximizes her own marginal benefit, which is at point C. Thus, only one streetlight will be provided.

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