Question

Complete the following table, which shows the combined benefits of Amy and Deborah as previously described. Amy and Deborah are considering contributing towards the creation of a water fountain. Each can choose whether to contribute $300 to the water fountain or to keep that $300 for a moblle phone. Since a water fountain is a public good, both Amy and Deborah will benefit from any contributions made by the other person. Complete the right-hand column of the following table which shows the individual benefits of Amy Hint: You are not required to consider the benefit of Deborah Contributes Doesn't contribute Specifically, every dollar that either one of them contributes will bring each of them $0.70 of benefit. For example, if both Amy and Deborah choose to contribute, then a total of $600 would be contributed to the water fountain. So, Amy and Deborah would each receive $420 of benefit from the water fountain, and their combined benefit would be $840. This is shown in the upper left cell of the first table. Contributes Doesn't contribute $720 Contribute Doesn't contribute Of the four cells of the table, which gives the greatest combined benefits to Amy and Deborah? Contribute $420 When neither Amy nor Deborah contributes to the water fountain Since a mobile phone is a private good, if Amy chooses to spend $300 on a mobile phone, Amy would get $300 of benefit When both Amy and Deborah contribute to the water from the mobile phone and Deborah wouldn't recelve any benefit from Amy's choice. If Amy still spends $300 on a mobile phone and Deborah chooses to contribute $300 to the water fountain, Amy would still receive the $210 of benefit from Deborah's generosity. In other words, if Amy decides to Now, consider the incentive facing Amy individually. keep the $300 for a mobile phone and Deborah decides to contribute the $300 to the public project, then Amy would receive a total benefit of $300+$210 $510$300+$210-$510 Deborah would receive a total benefit of $210, and their combined benefit would be $720. This is shown in the lower left previously, if both Amy and Deborah contribute to a cell of the first table. Doesn't contribute $510, If Deborah decides to contribute to the water fountain, Amy would maximise her benefit by choosing not to contribute/to contribute to the water fountain. On the other hand, if Deborah decides not to contribute to the water fountain, Amy would maximise her benefit by choosing not to contribute/to contribute to the When Amy contributes to the water fountain and Deborah doesn't, or vice versa The following table looks similar to the previous one, but this time, it is partially completed with the individual benefit data for Amy. As shown These results illustrate A. why markets are efficient B. the Tragedy of the Commons C. the free-rider problem D. the creation of a positive externality public good, Amy receives a benefit of $420. On the other hand, if Deborah contributes to the water fountain and Amy does not, Amy receives a benefit of 0

Answer 1

1)

Amy / Deborah	Contributes	Doesnt Contribute
Contributes	$840	$720
Doesnt Contribute	$720	$600

2) Ans. When both Amy and Deborah contribute to the water fountain.

When both Amy and Deborah contribute to the water fountain, the combined benefit is $840, which is the greatest combined benefit.

3)

Amy / Deborah	Contribute	Doesnt Contribute
Contribute	$420	$210
Doesnt contribute	$510	$300

If Deborah decides to contribute to the water fountain, Amy would maximise her benefit by choosing not to contribute (Benefit of Amy : $510) to the water fountain. On the other hand, if Deborah decides not to contribute to the water fountain, Amy would maximise her benefit by choosing not to contribute (Benefit of Amy : $300) to the water fountain.

4) Ans. C) the free rider problem.

Free rider is a benefit which a person gets without spending efforts or paying for it.