Question

3. Voluntary contributions toward a public good

Deborah and Janet are considering contributing toward the creation of a water fountain. Each can choose whether to contribute $400 to the water fountain or to keep that $400 for a weekend getaway.

Since a water fountain is a public good, both Deborah and Janet will benefit from any contributions made by the other person. Specifically, every dollar that either one of them contributes will bring each of them $0.60 of benefit. For example, if both Deborah and Janet choose to contribute, then a total of $800 would be contributed to the water fountain. So, Deborah and Janet would each receive $480 of benefit from the water fountain, and their combined benefit would be $960. This is shown in the upper left cell of the first table.

Since a weekend getaway is a private good, if Deborah chooses to spend $400 on a weekend getaway, Deborah would get $400 of benefit from the weekend getaway and Janet wouldn't receive any benefit from Deborah's choice. If Deborah still spends $400 on a weekend getaway and Janet chooses to contribute $400 to the water fountain, Deborah would still receive the $240 of benefit from Janet's generosity. In other words, if Deborah decides to keep the $400 for a weekend getaway and Janet decides to contribute the $400 to the public project, then Deborah would receive a total benefit of $400+$240=$640$400+$240=$640, Janet would receive a total benefit of $240, and their combined benefit would be $880. This is shown in the lower left cell of the first table.

Complete the following table, which shows the combined benefits of Deborah and Janet as previously described.

		Janet
		Contributes	Doesn't contribute
Deborah	Contributes	$960
	Doesn't contribute	$880

Of the four cells of the table, which gives the greatest combined benefits to Deborah and Janet?

A. When both Deborah and Janet contribute to the water fountain

B. When neither Deborah nor Janet contributes to the water fountain

C. When Deborah contributes to the water fountain and Janet doesn't, or vice versa

Now, consider the incentive facing Deborah individually. The following table looks similar to the previous one, but this time, it is partially completed with the individual benefit data for Deborah. As shown previously, if both Deborah and Janet contribute to a public good, Deborah receives a benefit of $480. On the other hand, if Janet contributes to the water fountain and Deborah does not, Deborah receives a benefit of $640.

Complete the right-hand column of the following table, which shows the individual benefits of Deborah.

Hint: You are not required to consider the benefit of Janet.

		Janet
		Contribute	Doesn't contribute
Deborah	Contribute	$480, --	, --
	Doesn't contribute	$640, --	, --

If Janet decides to contribute to the water fountain, Deborah would maximize her benefit by choosing ______________ to the water fountain. On the other hand, if Janet decides not to contribute to the water fountain, Deborah would maximize her benefit by choosing _________ to the water fountain.

These results illustrate   .

A. the creation of a positive externality

B. the free-rider problem

C. the Tragedy of the Commons

D.Why markets are efficient

Answer 1

		Janet
		Contributes	Doesn't contribute
Deborah	Contributes	$960	240+240+400=880
	Doesn't contribute	$880	400+400=800

Of the four cells of the table, which gives the greatest combined benefits to Deborah and Janet?

option A. When both Deborah and Janet contribute to the water fountain

		Janet
		Contribute	Doesn't contribute
Deborah	Contribute	$480, --	240, --
	Doesn't contribute	$640, --	400, --

If Janet decides to contribute to the water fountain, Deborah would maximize her benefit by choosing not to contribute to the water fountain. On the other hand, if Janet decides not to contribute to the water fountain, Deborah would maximize her benefit by choosing not to contribute to the water fountain.

These results illustrate.

option B. the free-rider problem