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CA Foundation · Business Economics · Public Finance

Two residents value a public fireworks display. Asha's marginal benefit is Rs 30 and Bilal's is Rs 50 for the display at the current level, and the marginal cost of providing it is Rs 70. Which statement is correct about the efficient provision?

The display should be expanded. For a public good, social marginal benefit is the sum of everyone's marginal benefits, here 30 plus 50 equals Rs 80, which exceeds the marginal cost of Rs 70. Efficiency requires provision to increase until the summed benefit equals marginal cost.

  1. AThe level should be expanded, since the sum of marginal benefits (Rs 80) exceeds marginal cost (Rs 70)Correct
  2. BThe level should be reduced, since each individual's marginal benefit is below Rs 70
  3. CThe level is efficient, since Bilal's benefit exceeds Asha's
  4. DThe level should be expanded only if Asha pays Rs 70

Explanation

For a public good, society's marginal benefit is the vertical sum of individual marginal benefits: 30 + 50 = Rs 80. Since 80 exceeds the marginal cost of 70, more should be provided until the sum equals marginal cost. Comparing individual benefits to cost, as in the reduction option, wrongly applies the private-good logic.

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