Caroline and Frances are considering contributing toward the creation of a publi
ID: 1110617 • Letter: C
Question
Caroline and Frances 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 cell phone Since a public park is a public good, both Caroline and Frances 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 Caroline and Frances choose to contribute, thena total of $600 would be contributed to the public park. So, Caroline and Frances would each receive $540 of benefit from the public park, and their combined benefit would be $1,080. This is shown in the upper left cell of the first table. Since a cell phone is a private good, if Caroline chooses to spend $300 on a cell phone, Caroline would get $300 of benefit from the cell phone and Frances wouldn't receive any benefit from Caroline's choice. If Caroline still spends $300 on a cell phone and Frances chooses to contribute $300 to the public park, Caroline would still receive the $270 of benefit from Frances's generosity. In other words, if Caroline decides to keep the $300 for a cell phone and Frances decides to contribute the S300 to the public project, then Caroline would receive a total benefit of $300+S270=$570, Frances 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 Caroline and Frances as previously described. Frances Contributes Doesn't contribute $1,080 Caroline Doesnt contribute$840 Of the four cells of the table, which gives the greatest combined benefits to Caroline and Frances? O when both Caroline and Frances contribute to the public park O When Caroline contributes to the public park and Frances doesn't, or vice versa O when neither Caroline nor Frances contributes to the public park Now, consider the incentive facing Caroline individually. The following table looks similar to the previous one, but this time, it is partially completed with the individual benefit data for Caroline. As shown previously, if both Caroline and Frances contribute to a public good, Caroline receives a benefit of $540. On the other hand, if Frances contributes to the public park and Caroline does not, Caroline receives a benefit of $570 Complete the right-hand column of the following table, which shows the individual benefits of Caroline. Hint: You are not required to consider the benefit of Frances. Frances Doesnt contribute Contribute $540, -- Caroline Doesnt contribute$570, -- If Frances decides to contribute to the public park, Caroline would maximize her benefit by choosing other hand, if Frances decides not to contribute to the public park, Caroline would maximize her benefit by choosing public park. to the public park. On the to the These results illustrateExplanation / Answer
1. When Frances doesn't contribute and Caroline Contribute:
Frances get benefit of 300 which he spend on weekend gateway and $ 270 i.e. 0.90 of $ 300 which Caroline spend on public good. So, total benefit received by Frances = 300 + 270 = $ 570
Caroline gets benefit of $ 270 only.
Total benefit = $ 570 + $ 270 = $ 840
2. When Frances and Caroline do not contribute:
Both will get benefit of $ 300 which they spend on weekend gateway. So, total benefit = $ 600
3. When both Caroline and Frances contribute to the public park.
4. Caroline benefit when Frances doesn't contribute: 0.90 of Caroline investment X 300 = $ 270
5. Caroline benefit when Frances and she don't contribute: $ 300
6. Not to contribute
7. Not to contribute
8. The free rider problem