1)Springfield, Oregon is deciding how many police officers to hire. Springfield's population is 10,000 people The marginal cost of a police officer is S50,000. The marginal benefit of an average city resident from police protection is shown below. Police protection is a public good. What is the marginal social benefit for all of Springfield from hiring the 4th police officer?

 

Number of police officers	Marginal benefit (dollars from the last officer)
1	8.00
2	7.20
3	6.40
4	5.60
5	4.80
6	4.00
7	3.20

2) If the government regulates the price a natural monopolist can charge to be equal to the firm's marginal cost, the government will likely need to subsidize the firm.

a. True

b. False

 

1)What is the marginal social benefit for all of Springfield from hiring the 4th police officer?

According to the table, the marginal social benefit would be $5.60 per person. That means the town's benefit is $56,000. Since the cost is only $50,000, hiring the 4th officer would be a good idea.

2)The correct answer is false (b).

A natural monopoly is a company that is the sole provider of a particular commodity in a given geographical area. It exists due to substantial initial capital requirements, such as infrastructure. It can also be a result of high economies of scale such that the company produces higher output incurring lower costs compared the competitors. Most utility providers, such as electricity and water, are examples of natural monopolies. In the modern economy, social media platforms such as Facebook qualify as natural monopolies. The prices for products in the monopoly are set above the marginal cost. Therefore if the government were to regulate price level to correspond with the marginal cost, the firm would still make normal profits, and the provision of subsidies is not necessary.