2. Paying for public goods Paolo and Van are considering contributing toward the
ID: 1174253 • Letter: 2
Question
2. Paying for public goods Paolo and Van 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 pool table. Since a water fountain is a public good, both Paolo and Van will benefit from any contributions made by the other person. Specifically, every dollar that either one of them contributes will bring each of them $0.70 of benefit. For example, if both Paolo and Van choose to contribute, then a total of $600 would be contributed to the water fountain. So, Paolo and Van would each receive $420 of benefit from the water fountain, and their combined benefit would be $840. This is shown in the upper left cell of the first table Since a pool table is a private good, if Paolo chooses to spend $300 on a pool table, Paolo would get $300 of benefit from the pool table and Van wouldn't receive any benefit from Paolo's choice. If Paolo still spends $300 on a pool table and Van chooses to contribute $300 to the water fountain, Paolo would still receive the $210 of benefit from Van's generosity. In other words, if Paolo decides to keep the $300 for a pool table and Van decides to contribute the $300 to the public project, then Paolo would receive a total benefit of $300 + $210 - $510, Van would receive a total benefit of $210, and their combined benefit would be $720. This is shown in the lower left cell of the first table Complete the following table, which shows the combined benefits of Paolo and Van as previously described Van Contributes Doesn't contribute Contributes $840 Paolo Doesn't contribute $720 sExplanation / Answer
Answer
If both doesnt contribute then combined benefits = 300 + 300 = 600
If Van doesnt contributes and Paolo contributes then VAN will recieve 510 and Paolo will recieve 210 and hence combined benefit = 210 + 510 = 720
VAN
As we can see from above table option 1 i.e. (When both Van and Paolo contribute to water fountain) gives the greatest combined benefits to Van and Paolo.
VAN
As we can see from above table, If Van decide to contribute to the water fountain Paolo would maximize his benefit by choosing not to contribute. On the other hand, If Van decides not to contribute to the water fountain Paolo would maximize his benefit by choosing not to contribute.
These results illustrate Why markets are efficient (this is a result of Standard Prisoners Dilemma)
Contribute Doesnt Contribute PAOLO Contribute 840 720 Doesnt Contribute 720 600Related Questions
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