Question

Suppose anyone with a driver's license in Megalopolis is capable of supplying one trip from the airport to the downtown business center on any given day. The long-run supply curve of such trips is horizontal at p = $50, which is the average cost of such trips. Suppose daily demand is Q = 1000 - 10p.

a)Calculate CS, PS and social welfare (W) for Megalopolis.

b) Now suppose that the Megalopolis city council requires those people supplying such trips to possess a special license, and they will issue only 300 licenses. What is the new CS, PS and social welfare (W) for Megalopolis?

c)What is the change in social welfare? Who gains and who loses from this policy?

Answer 1