27.1 We discussed in the text the basic externality problem that we face when we rely on...

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27.1 We discussed in the text the basic externality problem that we face when we rely on private giving to public projects. In this exercise, we consider how this changes as the number of people involved increases. A. Suppose that there are N individuals who consume a public good.

a. Begin with the best response function in panel

(a) of Graph 27.3; that is, the best response of one person’s giving to another person’s giving when N 5 2. Draw the 45-degree line into your graph of this best response function.

b. Now suppose that all N individuals are the same, just as we assumed the two individuals in Graph 27.3 are the same. Given the symmetry of the problem (in terms of everyone being identical), how must the contributions of each person relate to one another in equilibrium?

c. In your graph, replace y2 , the giving by person 2, with y and let y be the giving that each person other than person 1 undertakes (assuming they all give the same amount). As N increases, what happens to the best response function for person 1? Explain, and relate your answer to the free-rider problem.

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