Question

Juanita and Neha are considering contributing toward the creation of a public park. Each can choose whether to contribute $100 to the public park or to keep that $100 for a cell phone.

Since a public park 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 $0.60 of benefit. For example, if both Juanita and Neha choose to contribute, then a total of $200 would be contributed to the public park. So, Juanita and Neha would each receive $120 of benefit from the public park, and their combined benefit would be $240. This is shown in the upper left cell of the first table.

Since a cell phone is a private good, if Juanita chooses to spend $100 on a cell phone, Juanita would get $100 of benefit from the cell phone and Neha wouldn't receive any benefit from Juanita's choice. If Juanita still spends $100 on a cell phone and Neha chooses to contribute $100 to the public park, Juanita would still receive the $60 of benefit from Neha's generosity. In other words, if Juanita decides to keep the $100 for a cell phone and Neha decides to contribute the $100 to the public project, then Juanita would receive a total benefit of $100+$60=$160$100+$60=$160, Neha would receive a total benefit of $60, and their combined benefit would be $220. 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. Neha Contributes Doesn't contribute $240 $ Contributes Juanita Doesn't contribute $220 $ Of the four cells of the table, which gives the greatest combined benefits to Juanita and Neha? When both Juanita and Neha contribute to the public park When neither Juanita nor Neha contributes to the public park When Juanita contributes to the public park and Neha doesn't, or vice versa

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 $120. On the other hand, if Neha contributes to the public park and Juanita does not, Juanita receives a benefit of $160.

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.

Answer 1

The public good is characterized by non-rivalry and non-excludability. No one can decrease the consumption by others by consuming the good and no one can exclude others from consuming and have benefited from the good. One classic example is the national defense. These very characteristics give rise to the problem associated with contributing to the public good and its called the free-rider problem. The free-rider problem arises when everyone owning to the fact of non-excludability tends to free-ride on the public good without contributing towards. That is their contribution to the public good is zero at equilibrium or optimum.

In this case, if Juanita decides to contribute and Neha does not, then Juanita receives $60 and Neha receives $60 from J's contribution and $100 from purchasing the cell phone. Hence, their total benefit is ($100+$60+$60)=$220.

If both decide not to contribute, both receive $100 in private benefit and this makes total benefit equals to $200.

Neha Contributes Doesn't contribute $240 Contributes 220 Juanita $220 Doesn't contribute 200

Therefore, the greatest combined benefit occurs when both contributed towards the public good. Therefore, the correct option is

• 
  When both Juanita and Neha contribute to the public park
  

Now considering the only benefit for J, if she contributes and Neha does not, then the benefit is $60 only. If both of them don't contribute her benefit is $100 only.

Neha Contribute Doesn't contribute $ 60 $120,- Contribute Juanita $ $160, -- Doesn't contribute 100

Therefore, if N contributes, J will maximize the benefit by choosing not to contribute and if Neha chooses not to contribute J will maximize the benefit by choosing not to contribute.

Then whatever Neha does the optimum strategy of J is not to contribute but enjoy the public park if other one does.

Therefore, this result illustrate a free-rider problem.