12. Voluntary contributions towards a public good Latasha and Rosa are considering contributing towards the creation of a water fountain. Each can choose whether to contribute $300 to the water fountain or to keep that $300 for a new suit. Since a water fountain is a public good, both Latasha and Rosa will benet 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 benet. For example, if both Latasha and Rosa choose to contribute, then a total of $600 would be contributed to the water fountain. So, Latasha and Rosa would each receive $540 of benet 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 new suit is a private good, if Latasha chooses to spend $300 on a new suit, Latasha would get $300 of benefit from the new suit and Rosa wouldn't receive any benefit from Latasha's choice. If Latasha still spends $300 on a new suit and Rosa chooses to contribute $300 to the water fountain, Latasha would still receive the $270 of benefit from Rosa's generosity. In other words, if Latasha decides to keep the $300 for a new suit and Rosa decides to contribute the $300 to the public project, then Latasha would receive a total benefit of $300 + $270 = $570, Rosa would receive a total benet of $270, and their combined benet 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 Latasha and Rosa as previously described. Rosa Contributes Doesn't contribute Contributes $1,080 $ Latasha Doesn't contribute $840 $ Of the four cells of the table, which gives the greatest combined benefits to Latasha and Rosa? O When both Latasha and Rosa contribute to the water fountain When Latasha contributes to the water fountain and Rosa doesn't, or vice versa O When neither Latasha nor Rosa contributes to the water fountain Now, consider the incentive facing Latasha individually. The following table looks similar to the previous one, but this time, it is partially completed with the individual benefit data for Latasha. As shown previously, if both Latasha and Rosa contribute to a public good, Latasha receives a benefit of $540. On the other hand, if Rosa contributes to the water fountain and Latasha does not, Latasha receives a benefit of $570.Complete the right-hand column of the following table, which shows the individual benefits of Latasha. Hint: You are not required to consider the benefit of Rosa. Rosa Contribute Doesn't contribute Contribute $540, -- $ Latasha Doesn't contribute $570, -- $ If Rosa decides to contribute to the water fountain, Latasha would maximise her benefit by choosing to the water fountain. On the other hand, if Rosa decides not to contribute to the water fountain, Latasha would maximise her benefit by choosing to the water fountain. These results illustrate
