The mayor of Nizambora wants to set up street lights in every locality. The cost of setting up street lights in each locality is $900 . The estimated population of each locality is 100 . Despite not paying for the streetlights, the citizens where asked how much they were willing to pay for them. This was found to be $10 per person. Should the government provide street lights to every locality?
When deciding whether or not to provide a public good, governments should follow universal maximizing rules. That is, policy makers should compare the marginal cost of providing a public good to the marginal benefit of having that good or service. The policy decision should be to provide any good where society's marginal benefit is greater than the marginal cost of the good.
Using cost–benefit analysis, we can find out if the government should provide street lights or not.
The marginal cost of setting up street lights in each locality is $900.
The marginal benefit of the street lights is $10 x 100 = $1,000
As the marginal benefit of setting up street lights exceed the marginal cost of setting up street lights, the government should install street lights in every locality.
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