Problems for Section 101

3. One could answer by going through the gains and losses from the beginning, but a simpler and more illuminating argument builds on the argument in the text, as in Figure A10.1. The point Worse is the one to be evaluated relative to Equilibrium. The point Bad, however, stands between them, and is on the demand curve. The argument in the text shows that going from Equilibrium to Bad costs society on balance the shaded area L. What, then, is the subsequent loss of moving further, to Worse? Moving off both curves in the Worse direction makes both consumers and producers worse off: No one gains, unlike the earlier move from Equilibrium to Bad (in which consumers gain and producers lose). In particular, consumers lose the area Consumer Loss, which is the excess of the

rectangle of their payment for the additional quantity over the trapezoid of their additional unwillingness-to-pay. Likewise, producers lose the area Producer Loss, the excess of the trapezoid of their additional costs over the rectangle of their receipts. The whole loss is the sum, the lightly shaded area. And the loss from the entire move from Equilibrium through Bad to Worse is the entire lightly and heavily shaded triangle. In other words, as was to be shown, it Is bad on balance for society to stray from Equilibrium.

An even simpler argument follows from later developments of the idea of surpluses. Think of motorcyclists and sellers as one person, Society in Columbus. This person will incur larger costs than benefits if he produces and consumes beyond Equilibrium. The net loss will be in fact the big shaded triangle just identified in the diagram, since the triangle is the difference between the area under the cost curve and the area under the demand curve. And since society as a whole is worse off, any benefits to one segment must be more than offset by harm to some other, which was to be demonstrated.

5. The true marginal cost of a motorcycle, including every alternative sacrificed, is above the private cost perceived by the students. The students decide how many to buy on the basis of the low private marginal cost (the dashed curve in Figure A10.2); but if society as a whole had the decision it would decide how many to buy on the basis of the high, social marginal cost.

The optimum is Optimum, where marginal valuation equals (every and all) marginal cost. The market, however, leads to Market, where marginal valuation equals the cost faced by the students only. The excess number of motorcycles hurts society by the triangle L of the excess of social cost (L + C + R) over social benefit (C + R). Motorcyclists and their suppliers are better off by getting to Market, but by less than sleepers are made worse off.

8. True. Look back at Figure A10.2. The consumers and producers, who face the marginal private cost, would clearly desire as a group to move to Market, gaining the area C in mutual advantage. But each additional motorcycle beyond the low Optimum number puts costs on sleepers, in the summed account C + L (which is the vertical distance between private and social marginal cost). So the hurt to sleepers exceeds the joint gain to producers and consumers by L. As one would expect, the loss from moving from the Optimum to the Market is borne by the third party, sleepers, who do not bring dollar votes themselves into the decision of how many motorcycles Columbus should have.

Figure A10.2

Sleepers of Columbus, Lend Me Your Ears; Or, Why Too Many Motorcycles Exist

Motorcycles impose costs on sleepers, which the buyers and sellers of motor-Price and cycles do not consider. The socially optimum quantity of motorcycles, arrived

Cost of at by taking the costs to sleepers into account, is lower than the quantity

Motorcycles Market.

Marginal Social Cost

Marginal Private Cost

Marginal Social Cost

Noise Cost of an Additional Motorcycle

Marginal Private Cost

Demand (by Students)

Quantity of Motorcycles

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