3. Voluntary contributions toward a public good Sam and Andrew are considering c

Question

3. Voluntary contributions toward a public good Sam and Andrew are considering contributing toward the creation of a water fountain. Each can choose whether to contribute $300 to the water fountain or to keep that $300 for a cell phone. Since a water fountain is a public good, both Sam and Andrew 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 Sam and Andrew choose to contribute, then a total of $600 would be contributed to the water fountain. So, Sam and Andrew would each receive $540 of benefit from the water fountain, 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 Sam chooses to spend $300 on a cell phone, Sam would get $300 of benefit from the cell phone and Andrew wouldn't receive any benefit from Sam's choice. If Sam still spends $300 on a cell phone and Andrew chooses to contribute $300 to the water fountain, Sam would still receive the $270 of benefit from Andrew's generosity. In other words, if Sam decides to keep the $300 for a cell phone and Andrew decides to contribute the $300 to the public project, then Sam would receive a total benefit of $300+$270 $570, Andrew 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 Sam and Andrew as previously described. Andrew Contributes Doesn't contribute Contributes $1,080 Sam Doesn't contribute $840 Of the four cells of the table, which gives the greatest combined benefits to Sam and Andrew? 0 when Sam contributes to the water fountain and Andrew doesn't, or vice versa 0 when neither Sam nor Andrew contributes to the water fountain 0 when both Sam and Andrew contribute to the water fountain

Explanation / Answer

1. When Andrew doesn't contribute and Sam Contribute:

Andrew get benefit of 300 which he spend on cellphone and $ 270 i.e. 0.90 of $ 300 which Sam spend on public good. So, total benefit received by Andrew = 300 + 270 = $ 570

Sam gets benefit of $ 270 only.

Total benefit = $ 570 + $ 270 = $ 840

2. When Andrew and Sam do not contribute:

Both will get benefit of $ 300 which they spend on cell phone. So, total benefit = $ 600

3. When both Sam and Andrew contribute to the water fountain.

4. Sam benefit when Andrew doesn't contribute: 0.90 of Sam investment X 300 = $ 270

5. Sam benefit when Andrew and he don't contribute: $ 300

6. Not to contribute

7. Not to contribute

8. The creation of a positive externality

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