Hilary and Maria are considering contributing toward the creation of a building

Question

Hilary and Maria 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 pool table. Since a building mural is a public good, both Hilary and Maria 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 Hilary and Maria choose to contribute, then a total of $600 would be contributed to the building mural. So, Hilary and Maria 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 pool table is a private good, if Hilary chooses to spend $300 on a pool table, Hilary would get $300 of benefit from the pool table and Maria wouldn't receive any benefit from Hilary's choice. If Hilary still spends $300 on a pool table and Maria chooses to contribute $300 to the building mural, Hilary would still receive the $210 of benefit from Maria's generosity. In other words, if Hilary decides to keep the $300 for a pool table and Maria decides to contribute the $300 to the public project, then Hilary would receive a total benefit of $300+ $210= $510, Maria 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 Hilary and Maria as previously described. Of the four cells of the table, which gives the greatest combined benefits to Hilary and Maria? When both Hilary and Maria contribute to the building mural When neither Hilary nor Maria contributes to the building mural When Hilary contributes to the building mural and Maria Now, consider the incentive facing Hilary individually. The following table looks similar to the previous one, but this time, it is partially individual benefit data for Hilary. As shown previously, if both Hilary and Maria contribute to a public good, Hilary receives a benefit other hand, if Maria contributes to the building mural and Hilary does not, Hilary receives a benefit of $510. Complete the right-hand column of the following table which shows the individual benefits of Hilary. If Maria decides to contribute to the building mural, Hilary would maximize her benefit by choosing to to the building mural. On the other hand, if Maria decides not to contribute to the building mural, Hilary would maximize her benefit by choosing to to the building mural. These results illustrate Why markets are efficient The creation of a positive externality The Tragedy of the Commons The free-rider problem

Explanation / Answer

1. Combined Benefits:

a) $720 if Hillary contributes and Maria doesn't contribute

b) $600 if both Hillary and Maria do not contribute

2. Option A: Of the four cells of the table, the greatest combined benefits will be when they together contribute to the building of mural.

3. Individual benefits of Hillary:

a) $210 if Hillary contributes and Maria doesn't contribute

b) $300 if Hillary and Maria do not contribute

4. If Maria decides to contribute to the building mural, Hillary maximizes Maria's benefit by choosing to contribute to the building mural. If Maria decides not to contribute to the building mural, Hillary maximizes Maria's benefit by choosing to contribute to the building mural.

5. The free-rider problem

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