Question

National defense is a good that is nonexcludable and nonrival in consumption. Suppose that instead of national defense being paid for with tax dollars national defense is paid for by voluntary contributions from (potentially) all individuals within Latvia. Bob, who is a Latvian citizen, must decide whether he wants to contribute to the national-defense budget. Further, suppose that there are a total of 10 citizens, including Bob. For the optimal amount of safety, each citizen should pay $10 . Every $1 contributed (by anyone) to the national defense leads to increased security, which each person values at $0.25. This means that every dollar spent on defense is worth $2.50 to Latvia as a whole. How much does Bob personally value the increase in national defense when he contributes $10 to the defense fund?

Answer 1

Answer: $2.50

Step-by-step explanation:

We all know that national defense is a non excludable and no rival good which means that one person cannot exclude others from consuming it and the consumption level of national defense remains the same for all the citizens, it will not be reduced from the consumption of one individual.

It was given that each person values every dollar that is contributed towards national defense is at %0.25.

Therefore, if Bob contributes $10 to the national defense fund then his personal valuation of the increase in the fund is only (0.25 × 10)= $2.50.