Question

If people voluntarily contribute towards funding a public good, do you think there would be over or under-provision of the public good? Why?

Answer 1

If people voluntarily contribute towards funding a public good, there would be under- provision of public good. A public good is characterised by two qualities: non excludability and non rivalrous nature. Non- excludability refers to inability to exclude people from consuming a good based on pricing. For instance, everyone has access to public parks no matter whether they pay taxes or not. Non rivalrousness refers to the fact that the consumption of a good by one person does not reduce its availability for another person. For instance, street lights.

Let us suppose that people agree to voluntarily contribute towards funding a public good. Since the number of people involved will tend to be large and the social marginal benefits of public goods exceed private marginal benefits, everybody will contribute little amount or no amount thinking that others will contribute enough for provision. Each person will reason out that if everyone else makes a large contribution, I will enjoy a relatively high level of of public goods provision even if I do not make a large contribution. But since everyone reasons on this argument, so everyone makes small contributions. This phenomenon is called the free rider problem- everyone knows that he will be benefitted from the public good provided by everyone else and thus chooses to make a relatively small contribution.

If people voluntarily contribute towards funding a public good, there would be under- provision of public good unless the group of people is really small and everybody decides to contribute equal amount and contributions can be monitored.