Suppose anyone with a driver's license 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. Calculate the change in consumer surplus, producer surplus and social welfare if the city government requires
those people supplying such trips to possess a special license, and the government will issue only 300 licenses.
What will be an ideal response?
The competitive equilibrium is Q = 1000 - (10 ? 50 ) = 500. With the supply restriction of 300, price becomes $70. The loss in social welfare is [(70 - 50 ) ? (500 - 300 )]/2 = $2,000. Producers gain (70 - 50 ) ? 300 = $6,000. Consumers lose $6,000 + $2,000 = $8,000.
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