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3. Voluntary contributions toward a public good Charles and Gilberto are considering contributing toward the creation of a public park. Each can choose whether to
3. Voluntary contributions toward a public good Charles and Gilberto are considering contributing toward the creation of a public park. Each can choose whether to contribute $400 to the public park or to keep that $400 for a cell phone. Since a public park is a public good, both Charles and Gilberto 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 Charles and Gilberto choose to contribute, then a total of $800 would be contributed to the public park. So, Charles and Gilberto would each receive $640 of benefit from the public park, and their combined benefit would be $1,280. This is shown in the upper left cell of the first table. Since a cell phone is a private good, if Charles chooses to spend $400 on a cell phone, Charles would get $400 of benet from the cell phone and Gilberto wouldn't receive any benefit from Charles's choice. If Charles still spends $400 on a cell phone and Gilberto chooses to contribute $400 to the public park, Charles would still receive the $320 of benefit from Gilberto's generosity. In other words, if Charles decides to keep the $400 for a cell phone and Gilberto decides to contribute the $400 to the public project, then Charles would receive a total benefit of $400 + $320 = $720, Gilberto would receive a total benefit of $320, and their combined benefit would be $1,040. This is shown in the lower left cell of the first table. Complete the following table, which shows the combined benefits of Charles and Gilberto as previously described. Gilberto Contributes Doesn't contribute Contributes $1,280 $ Charles Doesn't contribute $1,040 Of the four cells of the table, which gives the greatest combined benefits to Charles and Gilberto? When Charles contributes to the public park and Gilberto doesn't, or vice versa O When both Charles and Gilberto contribute to the public park When neither Charles nor Gilberto contributes to the public park Now, consider the incentive facing Charles individually. The following table looks similar to the previous one, but this time, it is partially completed with the individual benefit data for Charles. As shown previously, if both Charles and Gilberto contribute to a public good, Charles receives a benefit of $640. On the other hand, if Gilberto contributes to the public park and Charles does not, Charles receives a benefit of $720.Complete the right-hand column of the following table, which shows the individual benefits of Charles. Hint: You are not required to consider the benefit of Gilberto. Gilberto Contribute Doesn't contribute Contribute $640, -- $ Charles Doesn't contribute $720, -- If Gilberto decides to contribute to the public park, Charles would maximize his benefit by choosing to the public park. On the other hand, if Gilberto decides not to contribute to the public park, Charles would maximize his benefit by choosing to the public park. These results illustrateContribute $640, rles Doesn't contri why markets are efficient berto decides to co the Tragedy of the Commons uld maximi hand, if Gilberto ( the creation of a positive externality park, Charle c park. the free-rider problem e results illustratesing to the public park. On th s ben to the not to contribute to contribute
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