1.8. The problem of public goods provision (discussed earlier in the textbook) can also be thought of as a problem of asymmetric information. Suppose there is a house with five roommates. Each roommate places the following value on having a communal fridge, which costs $500. Given that the total value is $540, it is economically efficient for the roommates to purchase the fridge.

Value (Willingness to Pay)

Roommate A Roommate B

$150

$150 Roommate C Roommate D

$80

$80 Roommate E

$80

a. Suppose each roommate is asked to pay $100 if the fridge is purchased. What would happen if the purchase decision was put to a vote?

b. What if, instead, each roommate could decide on her contribution? Why might this plan not work? Why is there asymmetric information in this situation? And why might this plan work if there were no asymmetric information?