Gilberto and Lorenzo are considering contributing toward the creation of a water

Question

Gilberto and Lorenzo 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 cell phone. Since a water fountain is a public good, both Gilberto and Lorenzo will benefit from any contributions made by the other person. Specifically, every dollar that either one of them contributes will bring each of them $0.80 of benefit. For example, if both Gilberto and Lorenzo choose to contribute, then a total of $800 would be contributed to the water fountain. So, Gilberto and Lorenzo would each receive $640 of benefit from the water fountain, and their combined benefit would be $1, 280. This is shown in the upper left cell of the first table. Since a cell phone is a private good, if Gilberto chooses to spend $400 on a cell phone, Gilberto would get $400 of benefit from the cell phone and Lorenzo wouldn't receive any benefit from Gilberto's choice. If Gilberto still spends $400 on a cell phone and Lorenzo chooses to contribute $400 to the water fountain, Gilberto would still receive the $320 of benefit from Lorenzo's generosity. In other words, if Gilberto decides to keep the $400 for a cell phone and Lorenzo decides to contribute the $400 to the public project, then Gilberto would receive a total benefit of $400+ $320= $720, Lorenzo would receive a total benefit of $320, and their combined benefit would be $1,040. This is shown in the lower left cell of the first table. Complete the following table, which shows the combined benefits of Gilberto and Lorenzo as previously described. Of the four cells of the table, which gives the greatest combined benefits to Gilberto and Lorenzo? When both Gilberto and Lorenzo contribute to the water fountain When Gilberto contributes to the water fountain and Lorenzo doesn't, or vice versa When neither Gilberto nor Lorenzo contributes to the water fountain Now, consider the incentive facing Gilberto individually. The following table looks similar to the previous one, but this time, it is partially completed with the individual benefit data for Gilberto. As shown previously, if both Gilberto and Lorenzo contribute to a public good, Gilberto receives a benefit of $640. On the other hand, if Lorenzo contributes to the water fountain and Gilberto does not, Gilberto receives a benefit of $720. Complete the right-hand column of the following table which shows the individual benefits of Gilberto. If Lorenzo decides to contribute to the water fountain, Gilberto would maximize his benefit by choosing to Not contribute the other hand, if Lorenzo decides not to contribute to the water fountain, Gilberto would maximize his benefit by choosing to water fountain.

Explanation / Answer

Combined Benefit Table :

L

Contribute Doesn't Contribute

Contribute 1280 1040

G

Does Not Contribute 1040 400 + 400 = 800

Answer 2:

greatest combined benefit when both contribute.

Answer 3:

L

C NC

C 640 320   

G

NC 720 400

Answer 4:

Not contributing

Not Contributing

Answer 5:

The free rider problem.

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