Which of the following explains how the government provides the optimal quantity of a public good?

• A. By setting the price equal to the average cost of production
• B. By maximizing the profit from the sale of the public good
• C. By providing the good only to those who are willing to pay for it
• D. By producing the quantity where the sum of individual marginal benefits equals the marginal cost of provision

Answer: (D)

Verified step by step guidance

1. Understand the nature of a public good: it is non-excludable and non-rivalrous, meaning that one person's consumption does not reduce availability to others, and people cannot be easily excluded from using it.
2. Recognize that the optimal provision of a public good occurs where the total benefit to society equals the cost of providing it. This involves summing the individual marginal benefits (MB) of all consumers because everyone benefits simultaneously.
3. Express the condition for optimal provision mathematically as: \(\sum MB_i = MC\), where \(\sum MB_i\) is the sum of all individual marginal benefits and \(MC\) is the marginal cost of providing the public good.
4. Note that setting the price equal to average cost or maximizing profit does not lead to the optimal quantity for public goods because these methods do not account for the total social benefit from consumption by all individuals.
5. Therefore, the government provides the optimal quantity of a public good by producing the quantity where the sum of individual marginal benefits equals the marginal cost of provision, ensuring efficient allocation of resources.