Question

3. Voluntary contributions toward a public good Dmitri and Jake are considering contributing toward the creation of a public park. Each can choose whether to contribute $300 to the public park or to keep that $300 for a pool table. Since a public park is a public good, both Dmitri and Jake will benefit from any contributions made by the other person. Specifically, every dollar that either one of them contributes will bring each of them $0.70 of benefit. For example, if both Dmitri and Jake choose to contribute, then a total of $600 would be contributed to the public park. So, Dmitri and Jake would each receive $420 of benefit from the public park, and their combined benefit would be $840. This is shown in the upper left cell of the first table. Since a pool table is a private good, if Dmitri chooses to spend $300 on a pool table, Dmitri would get $300 of benefit from the pool table and Jake wouldn't receive any benefit from Dmitri's choice. If Dmitri still spends $300 on a pool table and Jake chooses to contribute $300 to the public park, Dmitri would still receive the $210 of benefit from Jake's generosity. In other words, if Dmitri decides to keep the $300 for a pool table and Jake total benefit of $300 $210 = $510, Jake would receive a total decides to contribute the $300 to the public project, then Dmitri would receive benefit of $210, and their combined benefit would be $720. This is shown in the lower left cell of the first table.

If Jake decides to contribute to the public park, Dmitri would maximize his benefit by choosing (contribute/ not contribute)  to the public park. On the other hand, if Jake decides not to contribute to the public park, Dmitri would maximize his benefit by choosing (contribute/not contribute) to the public park.

These results illustrate (creation of a positive externatlity/ Tragedy of Common/ why markets are efficient/ the free-rider problem)

Answer 1

Combined benefit:-

When Dmitri contributes but Jake doesn't then payoff = 210+210+300 = 720

When Dmitri and Jake don't contribute then payoff = 300+300 =600

Of the four cells, the greatest combined benefits is-

When both Dmitri and Jake contribute to the public park

Individual benefit:-

When Dmitri contributes but Jake doesn't, then payoff = 210

When Dmitri and Jake don't contribute, then payoff = 300

If Jake decides to contribute to the public park, Dmitri would maximize his benefit by choosing (not contribute)  to the public park. On the other hand, if Jake decides not to contribute to the public park, Dmitri would maximize his benefit by choosing (not to contribute) to the public park.

These results illustrate (the free-rider problem)