Imagine strolling through the city center during Advent. The air is filled with the scent of mulled wine and roasted almonds, strings of lights illuminate the streets – and in the middle of the market square stands a beautifully decorated Christmas tree. You might wonder: Why is this tree here? Who paid for it, who decorated it, and why would anyone bother?
Economists would certainly ask this question because, from their perspective, this tree shouldn’t exist. The issue lies in the fact that the Christmas tree is what’s known as a “public good.” Public goods often lack the incentive for funding. They have two key characteristics: they are non-excludable and non-rivalrous. Non-excludability means that once the tree is decorated, no one can be prevented from admiring it. Non-rivalry means that one person’s enjoyment (“utility”) of the tree does not diminish the enjoyment of others. These qualities make public goods highly valuable – but also problematic. Why should anyone pay for something they can use for free? Most people simply hope that others will bear the costs. This behavior is known as the “free-rider problem.”
This problem doesn’t apply only to Christmas trees. Public swimming pools, parks, streetlights, or dikes are also examples of public goods. If no one takes responsibility, there will be no tree, no swimming pool – a classic economic dilemma.
The problem becomes even more pronounced in large communities or cities like Munich. There are many people who could step up and contribute, so shouldn’t someone be willing to do it? Surprisingly, the larger the group, the greater the likelihood that no one will take action. This phenomenon is called the “volunteer’s dilemma.” Everyone assumes, “Someone else will do it.” But if everyone thinks this way, nothing gets done – and the tree remains undecorated.
The issue lies in the distribution of costs and benefits. The effort of decorating the tree – in terms of time, labor, or financial resources – falls on the volunteers, while the benefits (as already mentioned) are shared by everyone. Everyone can enjoy the tree, regardless of whether or how much they contributed to its decoration. This creates an incentive to hold back and hope that someone else will take on the task. The larger the community, the stronger this logic becomes, as the personal contribution seems increasingly insignificant, while the effort remains the same.
How can this dilemma be resolved? The government often plays a key role, as it has the ability to require contributions from everyone through taxation. This is one of the core economic functions of the state: ensuring the adequate provision of public goods, such as parks, street lighting, or, in this case, a decorated Christmas tree.
Private incentives to provide public goods often exist but are typically not strong enough. However, in small, local communities, the benefits may be sufficiently high to enable a coordinated solution, particularly in cases of repeated cooperation. For example, retailers in a city center could collectively fund the Christmas tree, as a festively decorated marketplace attracts more visitors and encourages shopping. If some retailers opt out, sanctions might be appropriate, such as excluding them from future joint initiatives. When long-term cooperation is established and deviations can be penalized, the free-rider problem can also be addressed in private sector contexts.
Social norms also play a significant role. They function as informal mechanisms to promote cooperation. People are often motivated to contribute when they know their efforts will be recognized or when they feel part of a larger community. Research further shows that people value fairness highly and are even willing to incur personal costs to punish uncooperative behavior. This tendency to enforce fairness strengthens social cohesion and can encourage defectors to participate in the future.
Yet Christmas is a time when such economic considerations often take a backseat. It’s a season when community, joy, and generosity come to the forefront. When we admire the Christmas tree during Advent, we think less about who paid for or decorated it and more about what it gives us: a sense of togetherness, a little light in the darkness, and the hope that giving and receiving can go beyond mere self-interest.
Perhaps this is the most beautiful solution to the problem of public goods: a moment when we focus on the community and take joy in what we can achieve together. With this in mind: Merry Christmas and a Happy New Year!
More Information:
If you are interested in learning more about game-theoretic concepts and their applications or search for a Christmas gift, I recommend Bartholomae, F. & Wiens, M. (2024): Game Theory and Applications, A Guide for Students and Researchers, Springer: Wiesbaden.
Master’s students in the International Business program also have the opportunity to gain deeper insights into these fascinating concepts by enrolling in the elective course “Applied Game Theory,” where further practical applications of these theories are explored in depth.
