Voluntary contributions toward a public good
Clancy and Hubert are considering contributing toward the creation of a public park. Each can choose whether to contribute $300 to the public park or to keep that $300 for a pool table.
Since a public park is a public good, both Clancy and Hubert 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 Clancy and Hubert choose to contribute, then a total of $600 would be contributed to the public park. So, Clancy and Hubert would each receive $540 of benefit from the public park, and their combined benefit would be $1,080. This is shown in the upper left cell of the first table.
Since a pool table is a private good, if Clancy chooses to spend $300 on a pool table, Clancy would get $300 of benefit from the pool table and Hubert wouldn't receive any benefit from Clancy's choice. If Clancy still spends $300 on a pool table and Hubert chooses to contribute $300 to the public park, Clancy would still receive the $270 of benefit from Hubert's generosity. In other words, if Clancy decides to keep the $300 for a pool table and Hubert decides to contribute the $300 to the public project, then Clancy would receive a total benefit of $300+$270=$570
, Hubert 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 Clancy and Hubert as previously described.
Of the four cells of the table, which gives the greatest combined benefits to Clancy and Hubert?
Now, consider the incentive facing Clancy individually. The following table looks similar to the previous one, but this time, it is partially completed with the individual benefit data for Clancy. As shown previously, if both Clancy and Hubert contribute to a public good, Clancy receives a benefit of $540. On the other hand, if Hubert contributes to the public park and Clancy does not, Clancy receives a benefit of $570.
Complete the right-hand column of the following table, which shows the individual benefits of Clancy.
Hint: You are not required to consider the benefit of Hubert.