3. Voluntary contributions toward a public good Kyoko and Rina are considering c

Question

3. Voluntary contributions toward a public good Kyoko and Rina are considering contributing toward the creation of a building mural. Each can choose whether to contribute $300 to the building mural or to keep that $300 for a weekend getaway. Since a building mural is a public good, both Kyoko and Rina 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 Kyoko and Rina choose to contribute, then a total of $600 would be contributed to the building mural. So, Kyoko and Rina would each receive $420 of benefit from the building mural, and their combined benefit would be $840. This is shown in the upper left cell of the first table. Since a weekend getaway is a private good, if Kyoko chooses to spend $300 on a weekend getaway, Kyoko would get $300 of benefit from the weekend getaway and Rina wouldn't receive any benefit from Kyoko's choice. If Kyoko still spends $300 on a weekend getaway and Rina chooses to contribute $300 to the building mural, Kyoko would still receive the $210 of benefit from Rina's generosity. In other words, if Kyoko decides to keep the $300 for a weekend getaway and Rina decides to contribute the $300 to the public project, then Kyoko would receive a total benefit of S300+$210-$510, Rina would receive a total benefit of $210, and their combined benefit would be $720. This is shown in the lower left cell of the first table. Complete the following table, which shows the combined benefits of Kyoko and Rina as previously described. Rina Contributes Doesn't contribute Contributes $840 Kyoko Doesn't contribute $720

Explanation / Answer

COMBINED BENEFITS OF KYOKO AND RINA:

When Kyokao contributes $300 to builiding mural, then kyoko reeives the total benefit of $300 and Rina contributes for a weekend gateway , then Rina would receive the benefit of $300 from the private good and $210 from the contribution of kyoko to building mural(public good) , therefore Rina's total benefit would be $510.

When both decides not to contribute then each one would receive the benefit of $300 because of their contribution to the private and not to the public good.

Of the four cells , which gives the greatest combined benefits to Kyoko and Rina is When both Kyoko and Rina contribute to the building mural.

Now, INDIVIDUAL BENEFITS OF KYOKO AND RINA:

If Rina decides to contribute to the building mural, Kyoko would maximize her benefitby choosing Doesn't contribute to the building mural because this will give her benefit of $510. On the other hand , if Rina decides not to the building mural , Kyoko would maximize her benefit by choosing to contribute , actually he is different between both to the building mural.

These results illustrate the free rider problem. (because the contribution by one person maximiise the benefits for the other person by not contributing for that. This is the concept of free rider problem.

RINA Contribute Doesn't contribute KYOKO Contribute $840 $720 Doesn't contribute $720 $600

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