Manuel and Shen are considering contributing toward the creation of a public par
ID: 1105171 • Letter: M
Question
Manuel and Shen are considering contributing toward the creation of a public park. Each can choose whether to contribute $200 to the public park or to keep that $200 for a pool table. Since a public park is a public good, both Manuel and Shen 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 Manuel and Shen choose to contribute, then a total of $400 would be contributed to the public park. So, Manuel and Shen would each receive $240 of benefit from the public park, and their combined benefit would be $480. This is shown in the upper left cell of the first table. Since a pool table is a private good, if Manuel chooses to spend $200 on a pool table, Manuel would get $200 of benefit from the pool table and Shen wouldn't receive any benefit from Manuel's choice. If Manuel still spends $200 on a pool table and Shen chooses to contribute $200 to the public park, Manuel would still receive the $120 of benefit from Shen's generosity. In other words, if Manuel decides to keep the $200 for a pool table and Shen decides to contribute the $200 to the public project, then Manuel would receive a total benefit of , Shen would receive a total benefit of $120, and their combined benefit would be $440. This is shown in the lower left cell of the first table. Complete the following table, which shows the combined benefits of Manuel and Shen as previously described.
Complete the following table, which shows the combined benefits of Manuel and Shen as previously described.
Of the four cells of the table, which gives the greatest combined benefits to Manuel and Shen?
a(When Manuel contributes to the public park and Shen doesn't, or vice versa
b)When both Manuel and Shen contribute to the public park
C)When neither Manuel nor Shen contributes to the public park
Now, consider the incentive facing Manuel individually. The following table looks similar to the previous one, but this time, it is partially completed with the individual benefit data for Manuel. As shown previously, if both Manuel and Shen contribute to a public good, Manuel receives a benefit of $240. On the other hand, if Shen contributes to the public park and Manuel does not, Manuel receives a benefit of $320.
Complete the right-hand column of the following table, which shows the individual benefits of Manuel.
Hint: You are not required to consider the benefit of Shen.
, --
If Shen decides to contribute to the public park, Manuel would maximize his benefit by choosing (a)to contribute or b)to not contribute? to the public park. On the other hand, if Shen decides not to contribute to the public park, Manuel would maximize his benefit by choosing (a)to contribute or b)to not contribute? to the public park.
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
Shen Contributes Doesn't contribute Manuel Contributes $480 Doesn't contribute $440Explanation / Answer
1. When Shen doesn't contribute and Manuel Contribute:
Shen get benefit of 200 which he spend on pool table and $ 120 i.e. 0.60 of $ 200 which Manuel spend on public good. So, total benefit received by Shen = 200 + 120 = $ 320
Manuel gets benefit of $ 120 only.
Total benefit = $ 320 + $ 120 = $ 440
2. When Manuel and Shen do not contribute:
Both will get benefit of $ 200 which they spend on table pool. So, total benefit = $ 400
3. b) When both Manuel and Shen contribute to the public park.
4. Manuel's benefit when Shen doesn't contribute: 0.60 of Manuel investment X 200 = $ 120
5. Manuel's benefit when both don't contribute: $ 200
6. Not to contribute
7. Not to contribute
8. The creation of the positive externality
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