Reference no: EM131598182

1.Poverty reduction is a public good. It is non-rivalrous because when people benefit from having less poverty in their community it does not diminish the benefit others receive from having less poverty. It is non-excludable because when poverty is reduced people cannot be prevented from enjoying the benefits of it. However, Anti-poverty programs suffer from the free rider problem. Use the information below to illustrate the free rider problem.

There are two people: Allison (A) and Bianca (B)

There are two actions: Contribute (C) and Do Not Contribute (NC) Payoffs are as follows:

If Allison contributes and Bianca contributes, then the program is funded and they both receive $10 of satisfaction.

If Allison contributes and Bianca does not, then Allison receives -$5 of satisfaction while Bianca receives $20 worth.

If Bianca contributes but Allison does not, then Bianca receives -$5 of satisfaction while Allison receives $20 worth.

If they both do not contribute, then they both receive -$4 of satisfaction for being selfish.

1. What is the equilibrium to this game?
2. We know that taxing them could achieve a more efficient outcome. But, what if instead we made them feel guilty for not contributing. For example, let's post who donated, and more importantly who didn't, on a message board where all of their friends can see. Let's assume that this changes the payoff they receive from not contributing when others do from $20 to $5. And if they both don't contribute they feel really bad which changes both of their payoffs from -$4 to -$20. What is the new equilibrium?