Question

8. City residents complain about the noisy customers of the city’s bars. The Council decides to fine each bar in the area .50 per drink. Assume Joe's Bar is just one of many in the area so the perfect competition model can be used.

a. Use graphs to show the effect of the fine on the price charged, the quantity of drinks served and the profits at Joe's in the short run and long run.

b. How would your answer to a be different if Joe’s Bar was the only one in the city? (i.e. Joe’s bar has a monopoly) Explain your answer.

c. Is the noise created by Joe’s customers an externality? Explain. Will the tax increase or decrease deadwight loss?

Answer 1

a. The market price goes up by 0.50 as all sellers have to sell every unit at a higher price so the market Supply curve shifts leftward indicating a decrease in Supply because of an increase in price per unit. Thus in the market equilibrium quantity falls and equilibrium price rises.

For each of the individual, since it is a perfectly competitive market the price increases and each seller sells as much as each can at the given prices.

In the SR Joe profits decrease because of the increase in AC but over the LR some firms exit and all earn normal profits.