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). Compare the two mechanisms (administrative and price) for rationing the service. How do they compare in terms of efficiency (the size of the pie) and in terms of distributional impacts (the way the pie is divided up between the service users and taxpayers)?
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).
Compare the two mechanisms (administrative and
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