Decisions of Public Goods Game Through the lens of Game Theory

TL;DR

This paper analyzes public goods allocation issues using game theory, highlighting inefficiencies, strategic behaviors like free-riding, and evaluating theoretical solutions such as Lindahl pricing and voting mechanisms.

Contribution

It provides a formal analysis of public goods inefficiencies and evaluates the effectiveness and limitations of various game-theoretic mechanisms.

Findings

Competitive markets undersupply public goods due to strategic free-riding.

Strategic interactions lead to rational free-riding behavior in public goods provision.

Voting mechanisms and truth-revealing strategies have specific efficiency properties.

Abstract

This paper examines public goods and evaluates the mechanism through the game theory. Public goods are characterized by nonexclusivity and nonrivalry and this creates fundamental challenges for allocation. We analyze why competitive markets undersupply public goods by deriving the inefficiency formally through Nash equilibrium. The paper evaluates theoretical solutions including Lindahl pricing, Clarke-Groves mechanisms, and voting schemes. The paper will cover their efficiency properties and practical limitations. We show how strategic interaction leads to free-riding behavior using roommates dilemma and other examples. We also cover why a large household lives in messy conditions not because individuals are lazy, but because they are rational players in a Nash equilibrium. We also examine voting mechanisms, the median voter theorem, and recent developments in truth-revealing mechanisms.