Question

Both Wisconsin and Illinois border Lake Michigan. The lake is becoming polluted and both states are deciding whether or not to clean it. If Wisconsin decides to clean the lake it will cost 1200 and generate social benefits of 1500 - however, Wisconsin will receive only 1100 of those social benefits while neighbor Illinois will receive the other 400. If Illinois cleans the lake, it will cost them 700 and generate social benefits of 900 - however, Illinois will receive only 600 of those benefits, Wisconsin will receive the remaining 300. If a state does not clean the lake, it experiences a cost of $0. If Wisconsin does not clean the lake and Illinois does then the payoffs will be

Answer 1

Answer: the correct answer is Wisconsin gains 300, Illinois loses 100.

Explanation:

Wisconsin won't clean the lake so we have to leave it out of the calculation.

Now Illinois is the one that spends 700 but receives just 600 in benefits.

700-600= 100 ( Illinois loss)

Out of the 900 generated for cleaning the lake, Michigan gets 300, because Wiconsin receives 600, that is,

900-600 =300 ( Wisconsin gain)   (*Remember Wisconsin hasn't spent any single penny because it hasn't clean the lake).