Lorenzo and Sam are considering contributing toward the creation of a botanical

Question

Lorenzo and Sam are considering contributing toward the creation of a botanical garden. Each can choose whether to contribute $200 to the botanical garden or to keep that $200 for a cell phone. Since a botanical garden is a public good, both Lorenzo and Sam will benefit from any contributions made by the other person. Specifically, every dollar that either one of them contributes will bring each of them $0.80 of benefit. For example, if both Lorenzo and Sam choose to contribute, then a total of $400 would be contributed to the botanical garden. So, Lorenzo and Sam would each receive $320 of benefit from the botanical garden, and their combined benefit would be $640. This is shown in the upper left cell of the first table. f both Lorenzo and Sam choose to contribute, thena Since a cell phone is a private good, if Lorenzo chooses to spend $200 on a cell phone, Lorenzo would get $200 of benefit from the cell phone and Sam wouldn't receive any benefit from Lorenzo's choice. If Lorenzo still spends $200 on a cell phone and Sam chooses to contribute $200 to the botanical garden, Lorenzo would still receive the $160 of benefit from Sam's generosity. In other words, if Lorenzo decides to keep the $200 for a cell phone and Sam decides to contribute the $200 to the public project, then Lorenzo would receive a total benefit of $200+ $160 $360, Sam would receive a total benefit of $160, and their combined benefit would be $520. This is shown in the lower left cell of the first table. Complete the following table, which shows the combined benefits of Lorenzo and Sam as previously described. Sam Contributes Doesn't contribute Contributes $640 Lorenzo Doesn't contribute$520

Explanation / Answer

The correct choice is b : when both Lorenzo and Sam contribute to the botanical garden

If Sam decides to contribute to the botanical garden , then Lorenzo would maximize his benefit by chosing not to contribute to the botanical garden. On the other hand if sam decides not to contribute to the botanical garden , Lorenzo would maximize his benefit by contrbuting to the botanical garden.

These results illustrate non excludability of the public good .

Sam Contributes does not contribute Lorenzo Contributes 640 520 does not contribute 520 400

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