3. Voluntary contributions toward a public good Ginny and Lucia are considering

Question

3. Voluntary contributions toward a public good Ginny and Lucia are considering contributing toward the creation of a water fountain. Each can choose whether to contribute $300 to the water fountain or to keep that $300 for a weekend getaway. Since a water fountain is a public good, both Ginny and Lucia will benefit from any contributions made by the other person. Specifically, every dollar that either one of them contributes will bring each of them $0.90 of benefit. For example, if both Ginny and Lucia choose to contribute, then a total of $600 would be contributed to the water fountain. So, Ginny and Lucia would each receive $540 of benefit from the water fountain, and their combined benefit would be $1,080. This is shown in the upper left cell of the first table. Since a weekend getaway is a private good, if Ginny chooses to spend $300 on a weekend getaway, Ginny would get $300 of benefit from the weekend getaway and Lucia wouldn't receive any benefit from Ginny's choice. If Ginny still spends $300 on a weekend getaway and Lucia chooses to contribute $300 to the water fountain, Ginny would still receive the $270 of benefit from Lucia's generosity. In other words, if Ginny decides to keep the $300 for a weekend getaway and Lucia decides to contribute the $300 to the public project, then Ginny would receive a total benefit of , Lucia would receive a total benefit of $270, and their combined benefit would be $840. This is shown in the lower left cell of the first table. Complete the following table, which shows the combined benefits of Ginny and Lucia as previously described. Lucia Contributes Doesn't contribute Ginny Contributes $1,080 $ Doesn't contribute $840 $ Of the four cells of the table, which gives the greatest combined benefits to Ginny and Lucia? When Ginny contributes to the water fountain and Lucia doesn't, or vice versa When neither Ginny nor Lucia contributes to the water fountain When both Ginny and Lucia contribute to the water fountain Now, consider the incentive facing Ginny individually. The following table looks similar to the previous one, but this time, it is partially completed with the individual benefit data for Ginny. As shown previously, if both Ginny and Lucia contribute to a public good, Ginny receives a benefit of $540. On the other hand, if Lucia contributes to the water fountain and Ginny does not, Ginny receives a benefit of $570. Complete the right-hand column of the following table, which shows the individual benefits of Ginny. Hint: You are not required to consider the benefit of Lucia. Lucia Contribute Doesn't contribute Ginny Contribute $540, -- $ , -- Doesn't contribute $570, -- $ , -- If Lucia decides to contribute to the water fountain, Ginny would maximize her benefit by choosing to the water fountain. On the other hand, if Lucia decides not to contribute to the water fountain, Ginny would maximize her benefit by choosing to the water fountain. These results illustrate .

Explanation / Answer

Combined benefits of Ginny and lucia: From the question figures:

When both Ginny and Lucia contribute to the water fountain ,then , the combined benefits is highest .

Indivdual benefits of Ginny and Lucia :

Then,If Lucia decides to contributes to the water fountain and Ginny doesn't then, Ginny would maximise her benefit by choosing not to contribute to the water fountain (i.e 570).

On the other hand if Lucia decides not to contribute to the water fountain ,then Ginny would maximise her benefit by choosing not to contribute to water fountain. (i.e 300).

These results illustrate the FREE RIDER PROBLEM.

LUCIA Contribute Not contribute GINNY Contribute (540 +540)= 1080 [270 +(270+300)]= 840 Not-contribute [(270+300)+270)=840 (300+300)=600

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