Question

Say a community is willingness to pay $250,000 a year for a public good. The cost of providing the public good would be $200,000. Therefore, we could expect a privately owned, profit maximizing firm to go into the business of providing this community with this public good, because that firm could make a profit of $50,000 a year by doing so. True or false. Why?

Answer 1

A privately owned, profit maximizing firm would not go into the business of providing a public good in this situation because providing the public good would result in a profit of $50,000 a year, which is less than the cost of providing the good.

Step-by-step explanation:

The statement is false. A privately owned, profit maximizing firm would not go into the business of providing a public good in this situation because providing the public good would only result in a profit of $50,000 a year, which is less than the cost of providing the good ($200,000).To maximize profit, a firm typically seeks to provide goods or services that have a higher demand and higher profit potential. In this case, the demand for the public good is $250,000, which is the willingness to pay of the community. However, the cost of providing the good is $200,000, resulting in a profit of $50,000 ($250,000 - $200,000).A profit maximizing firm would consider other opportunities that have a higher profit potential and avoid providing a public good with a lower profit margin.