State the condition for the Pareto optimal provision of a public good. Interpret the condition.

5.. "Since a public good is enjoyed by all members of society, willingness to pay for the good will not diminish as the amount produced increases." Evaluate and use an example to support your answer. This statement is (correct incorrect). Public goods face (increasing, constant, diminishing ) returns like any other good. Consider the number of highways in a town, for example. Citizens of a town are very willing to pay for the first highway, as it produces large gains to the town. Successive highways produce (more and more, less and less ) willingness to pay because the citizens face lower and lower gains from the increased number of highways. In a town of, say 20,000, 15 highways (would, would not) produce much more benefit than just 2 or 3 highways because of ( increasing, constant, diminishing ) returns.

Some economists think that gas taxes in Europe, averaging around $2.50 per gallon, are too high from the perspective of economic efficiency. Suppose that this is true, and that social welfare could be increased with slightly lower gas taxes. Present a welfare analysis graph of the gasoline market in Europe with a gas tax that is too high. Identify five areas in your graph:   1. Consumer surplus 2. Producer surplus 3. Externality damage 4. Tax revenues 5. The potential welfare gain if taxes were lowered to the "correct" level.