Question

Suppose the Ames city council decides to fund the cleaning and maintenance of Ada Hayden Park with a system of voluntary contributions. The plan is to collect donations by asking Ames residents to mail a check to a city post office box each January. Use a simple two agent model to demonstrate why the funds collected under this plan will likely lead to a socially inefficient provision of maintenance services at Ada Hayden Park.

Answer 1

In this case, the park is classified as a public good since it is non-excludable and non-rival in consumption.

In general, if there are too many people using the public good, they will have collective action problem because of the free rider problem. The user will deplete the amount of the common resource available to others but does not take this cost into account when deciding how much to use the common resource. This gives rise to the tragedy of commons.

In this case, the system of voluntary contributions is followed, thus, agent A would pay for the provision of maintenance services and agent B would not. However, agent B will free ride on the services and thus it will lead to a socially inefficient provision of maintenance services at Ada Hayden Park since he will ignore the costs.