Study Guide, Chapter 5 True-False Questions 11. When the marginal benefit of a public good exceeds the marginal cost, there will be an overallocation of resources to that public good's use. A) B) True False

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Refer to Figure 5.5: The Collective Demand Curve (DC) represents the various levels of Marginal Benefit society gains consuming each unit of the public good. The Supply Curve (S) represents the Marginal Cost society incurs with each unit of the public good. Equilibrium occurs at three (3) units, where Marginal Benefit equal Marginal Cost at $5. At this point, there is an efficient allocation of resources. Now refer to Figure 5.4: Efficiency losses (deadweight losses) occur when quantities less than or greater than the efficient level (Q1) are produced. Efficiency loss from under-production means that resources are under-allocated (Q2). Note that at Q2, Marginal Benefit (D) is greater than Marginal Cost (S). Efficiency loss from over-production means that resources are over-allocated (as at Q3). Note that at Q3, Marginal Cost (S) is greater than Marginal Benefit (D). Therefore, the question above is a false statement. When the Marginal Benefit of a public good exceeds the Marginal Cost, that means the market is at some point where the Collective Demand Curve, DC) is higher than the Supply Curve (S). That occurs when there is an efficiency loss from under-production, meaning that there is an under-allocation of resources to that public good’s use. Think about this: When Marginal Benefit exceeds Marginal Cost, we want to consume more. Therefore, we expect that the market is providing less than the ideal amount of the good.