Question

 3. Voluntary contributions toward a public good

 Juanita and Neha 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 Juanita and Neha 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 Juanita and Neha choose to contribute, then a total of $600 would be contributed to the water fountain. So, Juanita and Neha 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 Juanita chooses to spend $300 on a weekend getaway, Juanita would get $300 of benefit from the weekend getaway and Neha wouldn't receive any benefit from Juanita's choice. If Juanita still spends $300 on a weekend getaway and Neha chooses to contribute $300 to the water fountain, Juanita would still receive the $270 of benefit from Neha's generosity. In other words, if Juanita decides to keep the $300 for a weekend getaway and Neha decides to contribute the $300 to the public project, then Juanita would receive a total benefit of $300 + $270 = $570, Neha 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 Juanita and Neha as previously described.

 Of the four cells of the table, which gives the greatest combined benefits to Juanita and Neha?

•  When Juanita contributes to the water fountain and Neha doesn't, or vice versa

•  When both Juanita and Neha contribute to the water fountain

•  When neither Juanita nor Neha contributes to the water fountain

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

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

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

 If Neha decides to contribute to the water fountain, Juanita would maximize her benefit by choosing _______  to the water fountain. On the other hand, if Neha decides not to contribute to the water fountain, Juanita would maximize her benefit by choosing _______  to the water fountain.

 These results illustrate _______ .

Answer 1

-When both Juanita and Neha contributes

Blanks-

1) not to contribute

2) not to contribute

3) the free rider problem