Why were states willing to invest the time and money needed to build canals, considering the characteristics of public goods and their demand curve?

• A. Because canals only benefited a small group of private investors
• B. Because canals allowed states to charge high tolls and exclude non-payers easily
• C. Because canals decreased the demand for transportation services in the region
• D. Because canals provided non-excludable and non-rival benefits that increased overall economic welfare

Answer: (D)

Verified step by step guidance

1. Step 1: Understand the characteristics of public goods. Public goods are typically non-excludable (people cannot be easily prevented from using them) and non-rivalrous (one person's use does not reduce availability to others).
2. Step 2: Analyze how canals fit these characteristics. Canals provide transportation infrastructure that benefits many users simultaneously without excluding others easily, making them similar to public goods.
3. Step 3: Consider the demand curve for public goods. Unlike private goods, the demand curve for public goods is derived from the sum of individual willingness to pay, reflecting the total benefit to society rather than individual consumers alone.
4. Step 4: Recognize why states invest in canals despite high costs. Because canals generate widespread benefits that improve overall economic welfare, states are motivated to invest even if direct toll revenues or private profits are limited.
5. Step 5: Conclude that the public good nature of canals justifies state investment, as the positive externalities and increased economic activity outweigh the costs, leading to greater social benefits.