Topic: Public Goods

Major towns and cities in Ibadan State, which is one of the states in the South West of the country, are maintained by local government councils, which are funded through allocations from the federation account, state accounts, and internally generated revenue. The local government councils submit budgets each year, which forms the basis of the funds received.

Matanmi Local Government Council, one of the local government councils in Ibadan State, provides you with the following information as part of the 2019 budget preparation:

Overheads:
Overhead costs are budgeted on an incremental basis, taking the previous year’s actual expenditure and adding a set percentage to allow for inflation. Adjustments are also made for known changes. The details are:

Note 1: One new staff member will be added to the payroll, costing N300,000 in 2020.
Note 2: A move toward a paperless office is expected to reduce stationery costs by 20% in 2020.
Road Repairs:
In 2020, it is expected that 200 kilometers of road will require maintenance, but a contingency of an extra 10% has been agreed.
In 2019, the average cost of a road repair was N1,500,000 per kilometer, but this did not include any cost effects of extreme weather conditions. The following probability estimates have been made in respect of 2020:

Inflation on road maintenance costs is expected to be 10% between 2019 and 2020.

New roads are budgeted on a zero-based basis and will have to compete for funds along with other capital projects such as hospitals and schools.
Required:
a. Calculate the overheads and road repairs budgets for the year 2020.
(10 Marks)

b. The goods and services produced in every society can be classified into public and private goods.
Identify and explain TWO sub-divisions and THREE characteristics of public goods.
(10 Marks)