Final answer:
The law of diminishing marginal utility explains the allocation of resources in public goods production by indicating that as additional resources are devoted to public service, the marginal gains tend to decline. The correct option is B.
Step-by-step explanation:
The law of diminishing marginal utility is important to the provision of public goods because it explains the allocation of resources in public goods production. This economic principle states that as we consume more of a good or service, the additional satisfaction or utility we gain from consuming an extra unit tends to decrease. In the context of public goods, which are non-excludable and non-rivalrous, the utility derived from additional increments of public spending will also diminish over time.
For example, initial investments in public goods such as crime reduction can have large benefits. However, continuing to invest more resources results in increasingly smaller gains. This concept helps guide governments in efficiently allocating resources to maximize social welfare within the constraints of an opportunity set, which includes all the possible combinations of consumption that a society can afford, given incomes and the prices of goods. By understanding the law of diminishing marginal utility, governments can more effectively decide when the additional costs of improving a public good outweigh the benefits, thus achieving allocative efficiency and ensuring that limited resources are directed towards areas where they have the greatest impact.