Manuel and Shen are considering contributing toward the creation of a botanical garden. Each can choose whether to contribute $300 to the botanical garden or to keep that $300 for a cell phone.
Since a botanical garden is a public good, both Manuel and Shen 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 Manuel and Shen choose to contribute, then a total of $600 would be contributed to the botanical garden. So, Manuel and Shen would each receive $540 of benefit from the botanical garden, and their combined benefit would be $1,080. This is shown in the upper left cell of the first table.
Since a cell phone is a private good, if Manuel chooses to spend $300 on a cell phone, Manuel would get $300 of benefit from the cell phone and Shen wouldn't receive any benefit from Manuel's choice. If Manuel still spends $300 on a cell phone and Shen chooses to contribute $300 to the botanical garden, Manuel would still receive the $270 of benefit from Shen's generosity. In other words, if Manuel decides to keep the $300 for a cell phone and Shen decides to contribute the $300 to the public project, then Manuel would receive a total benefit of $300 + $270 = $570 $300 + $270 = $570, Shen 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. Of the four cells of the table, which gives the greatest combined benefits to Manuel and Shen?
A. When neither Manuel nor Shen contributes to the botanical garden
B. When Manuel contributes to the botanical garden and Shen doesn't, or vice versa
C. When both Manuel and Shen contribute to the botanical garden
Now, consider the incentive facing Manuel individually. The following table looks similar to the previous one, but this time, it is partially completed with the individual benefit data for Manuel. As shown previously, if both Manuel and Shen contribute to a public good, Manuel receives a benefit of $540. On the other hand, if Shen contributes to the botanical garden and Manuel does not, Manuel receives a benefit of $570.
Complete the right-hand column of the following table which shows the individual benefits of Manuel.
Hint: You are not required to consider the benefit of Shen.
Complete the following table, which shows the combined benefits of Manuel and Shen as previously described. If Shen decides to contribute to the botanical garden, Manuel would maximize his benefit by choosing to _Contribute / Not Contribute__ to the botanical garden. On the other hand, if Shen decides not to contribute to the botanical garden, Manuel would maximize his benefit by choosing to __Contribute / Not Contribute__ to the botanical garden.
These results illustrate _________ .
A. The creation of a positive externality
B. Why markets are efficient
C. The free-rider problem
D. The common-pool problem