Should people have the right to sell parts of their bodies? European govern- ments believe the answer is "no". As the law stands now, the sale of organs for transplantation is prohibited. Organs may only be donated, so that from an eco- nomic perspective, their market price is zero. Although the law prohibits their sale, this does not make organs valueless. In- stead, it prevents those who supply organs (living persons or the families of the deceased) from reaping their economic value. It also creates a shortage of organs. In the early 2000s, about 10,000 kidneys, 20,000 corneas, and 1,200 hearts were transplanted annually in the European Union. However, there was a considerable excess demand for these organs, and many potential recipients had to do without them. Some of these potential recipients actually died as a result. P Q At the time, health economists estimated the shortage of kidneys to be 10,000 per year. Additionally, using statistical techniques, they estimated that 5,000 more kidneys would be supplied if their market price were $25,000. At that price, the number of kidneys demanded was estimated at 15,000 per year. The supply anddemand curves for kidneys can be approximated adequately by linear ones, as in the figure above. Economists are able to compute the welfare of kidney suppliers and recipients by using the concepts of consumer and producer surplus. Consumer surplus is a measure of the value to consumers of a particular good in monetary terms. The consumer surplus enjoyed from consuming a particular good equals an area below its demand curve of appropriate length minus the total costs consumers had to make in order to buy that good. Similarly, the producer surplus enjoyed by selling a particular good equals total revenues from sales minus total variable costs of production, which in turn is equal to a certain area above the supply curve. Finally, total welfare can be determined simply as the sum of consumer and producer surplus. In May 2007, the Dutch TV station BNN announced that it would broadcast a new reality show, called "The Big Donor Show". Three kidney patients, all in desperate need of a transplant, were to compete for the favours of a terminally ill 37-year-old woman. At the end of the show, she would donate her kidneys (to become available after her imminent death) to the "candidate" of her choice. During the last episode, the entire show turned out to be a brilliant hoax; but by then, emotional outcries had been heard from around the world. de grote DONORSHOW This episode illustrates that many complex ethical and economic issues are involved in the allocation, let alone the commercial sale, of human organs. These issues are important, and this task is by no means intended to sweep them under the rug. Eco- nomics, the "dismal science", simply shows us that human organs have economic value that should not be ignored, and that prohibiting their sale imposes a welfare loss on society that must be weighed against the benefits. Such a welfare loss is typically referred to as a deadweight loss (no cynicism intended!). In the kidney ex- ample at hand, there is enough information to fully characterize the linear demand and supply curves; this should enable you to verify that the deadweight loss that occurs in this market as a result of the sales prohibition can be estimated at (minus)$125 million. Case 1: No free-trade in kidneys (a) (10 points) Using the information given in the text above, determine the market price, market supply, and market demand (market supply +estimated shortage) of kidneys. (b) (15 points) At a price of $25,000 supply and demand are equal to 15,000. Use this information together with the market demand you found in part (a) to determine the vertical and horizontal intercepts of the demand curve. (c) (25 points) Using the information provided, determine the other relevant inter- cepts in the graph and compute the consumer and producer surplus and total welfare in this case. Case 2: Free-trade in kidneys (a) (20 points) Compute the consumer and producer surplus and the total welfare in this case. (b) (20 points) How do your results compare to the no-free trade case? Calculate the differences in the results. Explain why we end up with deadweight loss if trade of kidneys is prohibited and calculate how much deadweight loss there is. (c) (10 points) If you were to give policy recommendations to market regulators, what would you suggest? Explain in as much detail as you can