Suppose a new social service is introduced by a government at a fixed cost of $3,000 (note: there is no marginal cost to provide this service). This service has not been provided before and there is no available substitute for this service. Economists have estimated the marginal benefit of the new service is given by: MB = 100 – Q where Q is the quantity (in hours) of the service that is used. Please note the MB gives both the marginal private benefit (MPB) and marginal social benefit (MSB) (i.e., MB = MPB = MSB). To ensure those that need the service the most are the ones that receive it, the government sets up an administrative mechanism to ration the 50 hours of service (e.g. people have to meet certain criteria that have to be checked). The cost to the government of setting up this mechanism is $500. Is it a good investment for the government to provide the service with this rationing mechanism in place? What is the net social benefit that is created? Explain your reasoning and provide numerical support for your answer
Suppose a new social service is introduced by a government at a fixed cost of $3,000 (note: there is no marginal cost to provide this service). This service has not been provided before and there is no available substitute for this service. Economists have estimated the marginal benefit of the new service is given by:
MB = 100 – Q
where Q is the quantity (in hours) of the service that is used. Please note the MB gives both the marginal private benefit (MPB) and marginal social benefit (MSB) (i.e., MB = MPB = MSB).
To ensure those that need the service the most are the ones that receive it, the government sets up an administrative mechanism to ration the 50 hours of service (e.g. people have to meet certain criteria that have to be checked). The cost to the government of setting up this mechanism is $500. Is it a good investment for the government to provide the service with this rationing mechanism in place? What is the net social benefit that is created? Explain your reasoning and provide numerical support for your answer.
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