2 Voluntary contributions toward a public good Aa Aa David a

2. Voluntary contributions toward a public good Aa Aa David and Robert are considering contributing toward the creation of a building mural. Each can choose whether to contribute $200 to the building mural or to keep that $200 for a cell phone Since a building mural is a public good, both David and Robert will benefit from any contributions made by the other person. Specifically, every dollar that either one of them contributes will bring each of them $0.75 of benefit. For example, if both David and Robert choose to contribute, then a total of $400 would have been contributed to the building mural. So, David and Robert would each receive $300 of benefit from the building mural, and their combined benefit would be $600 Since a cell phone is a private good, if David chooses to spend $200 on a cell phone, David would get $200 of benefit from the cell phone and Robert wouldn\'t receive any benefit from David\'s choice. However, if Robert chooses to contribute $200 to the building mural, David would still receive the $150 of benefit from Robert\'s generosity. In other words, if David decides to keep the $200 for a cell phone and Robert decides to contribute the $200 to the public project, then David would receive a total benefit of $200 + $150 = $350, Robert would receive a total benefit of $150, and their combined benefit would be $500 The following table shows the combined benefits of David and Robert. As described previously, if both David and Robert contribute to the building mural, their combined benefit would be $600; this is shown in the upper left cell of the table. Similarly, if David keeps the $200 for a cell phone and Robert contributes to the project, their combined benefit would be $500; this is shown in the lower left cell of the table. Fill in the right-hand column of the table Robert\'s Decision Contribute Don\'t Contribute Contribute $600 David\'s Decision Don\'t Contribute $500

Solution

Ans

Robert

Contribute Dont Contribute

Contribute 300+300 150+350

David

Dont COntribute 350+150 200+200

When both decide to contribute they receive benefit of $600

When either of them contributes then benefit is $500

When no one contributes then benefit is $400

Robert

Contribute Dont Contribute

Contribute 300 150

David

Dont Contribute 350 200

If Robert decides to contribute then David should choose not to contribute

If Rober decides not to contribute then David again choose not to contribute

This result illustrate free-rider problem