![]() ![]() The key insight in paying for public goods is to find a way of assuring that everyone will make a contribution and to prevent free riders. ![]() The Role of Government in Paying for Public Goods ![]() When both people reason in that way, the public good never gets built, and there is no movement to the option where everyone cooperates-which is actually best for all parties. Samuel reasons the same way about Rachel. Either way, I should choose not to contribute, and instead hope that I can be a free rider who uses the public good paid for by Samuel. However, if Samuel does contribute, then I can come out ahead by not contributing. Rachel reasons in this way: If Samuel does not contribute, then I would be a fool to contribute. The difficulty with the prisoner’s dilemma arises as each person thinks through his or her strategic choices. Contributing to a Public Good as a Prisoner’s Dilemma This sets up the prisoner's dilemma illustrated in Table 1. The problem is that, while Rachel and Samuel pay for the entire cost of their contribution to the public good, they receive only half of the benefit, because the benefit of the public good is divided equally among the members of society. Because society's benefit of $6 is greater than the cost of $4, the investment is a good idea for society as a whole. When either of them contributes to a public good, such as a local fire department, their personal cost of doing so is $4 and the social benefit of that person's contribution is $6. Say that two people are thinking about contributing to a public good: Rachel and Samuel. The free rider problem can be expressed in terms of the prisoner's dilemma game, which we learned about in the module on monopolistic competition and oligopoly. When individuals make decisions about buying a public good, a free rider problem can arise, in which people have an incentive to let others pay for the public good and then to "free ride" on the purchases of others. Visit this website to read about a connection between free riders and "bad music." ![]()
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