Question

To an economist, a government program is too big if an analysis of that program finds that \(\mathrm{MB}\)______ MC. a. Is greater than. b. Is less than. c. Is equal to. d. Is less than twice as large as. e. Is more than twice as large as.

Short answer

b. Is less than.

Step-by-step solution

Understanding Marginal Benefit and Marginal Cost

In economics, the marginal benefit (MB) refers to the additional benefit received from consuming one more unit of a good or service. Marginal cost (MC) is the cost of producing one more unit of a good or service. The comparison of MB and MC helps determine the optimal size of a program.

Optimal Program Size

For a government program to be of optimal size, its marginal benefit (MB) should be equal to its marginal cost (MC), meaning any additional cost should provide equivalent benefit. This is when resources are allocated most efficiently.

Identifying When a Program Is Too Big

If a government program is considered too big, it means that continuing the program results in the costs outweighing the benefits. This happens when marginal cost (MC) exceeds marginal benefit (MB).

Key concepts

Marginal Benefit

Marginal Benefit, often abbreviated as MB, is a crucial concept in understanding economic decisions. It represents the additional satisfaction or utility a consumer receives from consuming one more unit of a good or service. For instance, if sipping another cup of coffee brings you joy, that joy is your marginal benefit.

In decision-making, individuals and policymakers compare MB with Marginal Cost (MC). If MB is greater than MC, it often signals that more units should be consumed or produced.

• If you buy a second movie ticket because watching another movie delights you, and the pleasure exceeds the ticket price, your MB outweighs MC.
• Firms use MB to decide output levels; when MB equals MC, the firm achieves optimal production.
• Governments look at MB to ensure programs provide sufficient societal benefit compared to their costs.

Understanding MB helps individuals, businesses, and governments make informed choices about resource allocation.

Marginal Cost

Marginal Cost, labeled as MC, refers to the additional expense incurred from producing one more unit of a good or service. It's essential for evaluating the efficiency of any operation.

For example, if a shoe factory can produce one more pair of shoes for $10, then $10 is the MC for that additional pair. Analyzing MC helps determine whether increasing production is worthwhile.

• If producing an extra car costs less than the price it can be sold for, the firm gains a profit. Here, benefits exceed costs.
• Conversely, if MC climbs due to factors like resource scarcity, surpassing MB, further production might not be justified.
• In governmental budgeting, understanding MC ensures that public funds are used efficiently.

Analyzing MC allows decisions to be made about scaling up or trimming down operations for optimal performance and resource utilization.

Government Program Evaluation

Evaluating government programs involves comparing costs, known as marginal costs, with the benefits, known as marginal benefits. This ensures that the resources dedicated to programs are used efficiently and effectively.

A government program is determined to be too large if its marginal cost exceeds its marginal benefit. This means resources are being overextended without adequate return in utility. On the other hand, a program may be considered optimal when its MB equals its MC, signaling balanced resource use.

• For example, if a government education initiative costs more per student than the educational benefits students receive, the program may need reassessment.
• Cost-benefit analysis helps in determining such measures, ensuring that taxpayer money is not wasted.
• Periodic evaluations can adjust program size to maintain effectiveness and efficiency.

Overall, efficient government program evaluation hinges on continuous assessment of both marginal benefits and costs, safeguarding public interests.