Final answer:
The public goods game reflects a scenario where the optimal strategy for individual gain is not contributing, leading to a free rider problem. However, in real experiments like the ultimatum game, players often offer fairly equal splits, showing a desire for fairness over maximizing self-interest. National defense is a public good funded by the government to avoid underprovision.
Step-by-step explanation:
Understanding the Public Goods Game
The public goods game is a standard of economic experiments in which individuals decide how much to contribute to a common pool that will benefit all players. The optimal strategy for an individual seeking to maximize gain is to contribute nothing and to "free ride" on the contributions of others, as the social benefits of contributing are spread among all players, regardless of their individual contributions. However, if everyone adopts this strategy, the public good will not be produced. Two examples of public goods are national defense and public parks, which are nonexcludable and non-rival in nature; no individual can be effectively excluded from their benefits, and one person's use of the good does not diminish its availability to others.
The free rider problem refers to the situation where individuals have an incentive to avoid paying for a public good, expecting others to cover the cost, which can lead to underprovision of these goods.
In experimental settings, such as the ultimatum game, the predicted offer by Player 1 to maximize self-gain might be the minimum acceptable amount to Player 2. However, actual experiments have shown that typical offers are often close to equal splits, such as $6-4 or $7-3 in favor of Player 1, reflecting a preference for fairness over maximizing individual gain.
The federal government funds public goods, such as national defense, because they are essential services that benefit all, regardless of individual contributions, and private entities would likely underprovide them due to the free rider problem.