Reference no: EM131170680

Voluntary contributions toward a public good:

Poornima and Valerie are considering contributing toward the creation of a botanical garden. Each can choose whether to contribute $300 to the botanical garden or to keep that $300 for a cell phone. Since a botanical garden is a public good, both Poornima and Valerie 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 Poornima and Valerie choose to contribute, then a total of $600 would be contributed to the botanical garden. So, Poornima and Valerie would each receive $540 of benefit from the botanical garden, and their combined benefit would be $1,080. This is shown in the upper left cell of the first table. Since a cell phone is a private good, if Poornima chooses to spend $300 on a cell phone, Poornima would get $300 of benefit from the cell phone and Valerie wouldn't receive any benefit from Poornima's choice. If Poornima still spends $300 on a cell phone and Valerie chooses to contribute $300 to the botanical garden, Poornima would still receive the $270 of benefit from Valerie's generosity. In other words, if Poornima decides to keep the $300 for a cell phone and Valerie decides to contribute the $300 to the public project, then Poornima would receive a total benefit of , Valerie 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 Poornima and Valerie as previously described.

Valerie

Contributes Doesn’t contribute

Poornima Contributes $1,080 ___________

Doesn’t contribute $840 __________

Of the four cells of the table, which gives the greatest combined benefits to Poornima and Valerie?

______ When neither Poornima nor Valerie contributes to the botanical garden.

______ When Poornima contributes to the botanical garden and Valerie doesn't, or vice versa.

______ When both Poornima and Valerie contribute to the botanical garden

Now, consider the incentive facing Poornima individually. The following table looks similar to the previous one, but this time, it is partially completed with the individual benefit data for Poornima. As shown previously, if both Poornima and Valerie contribute to a public good, Poornima receives a benefit of $540. On the other hand, if Valerie contributes to the botanical garden and Poornima does not, Poornima receives a benefit of $570.

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

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

Valerie

Contribute Don’t contribute

Poornima Contribute $540, -- , -- _______________

Don’t contribute $570, -- , -- ________________

If Valerie decides to contribute to the botanical garden, Poornima would maximize her benefit by choosing (not contribute or contribute) ____________ (to to the botanical garden. On the other hand, if Valerie decides not to contribute to the botanical garden, Poornima would maximize her benefit by choosing (not contribute or contribute) ________ (to to the botanical garden. These results illustrate ________________ (why markets are efficient, the free-rider problem, the Tragedy of the commons, or the creation of a positive externality)