The City of Cambridge is concerned about the number of wild MIT students who will be partying on Halloween and wants to limit the number of parties in order to curb the costs of policing underage drinking and noise violations. The city has asked you to evaluate the welfare implications of policies they are considering. Think of price here as the amount of money party hosts will collect at the door from party-goers. The demand for parties is given by=3002. The supply

of parties is given by=.

P(S) = 60

P(C) = 120

Q(T) = 60

What is the deadweight loss of the tax?

What is the consumer surplus post-tax?

What is the Producer surplus post tax?

Tax revenue?

If you were to graph it, Does the Total surplus decrease, increase or stays the same?

If you were to graph it, Does the consumer surplus stay the same, increase or decrease?

If you were to graph it, Does the producer surplus decrease, increase or stays the same?

Nowlet's suppose instead of a tax, the city requires all parties to obtain a license, and only 50 licenses will be made available for October 31. Assume they can perfectly enforce this policy, and there is no way for a party to happen without a license. What is the new price and quantity?

Letbe the quantity after licenses are required andbe the price after licenses are required.

= ?

= ?

Now, lets assume that the licenses go to the 50 party hosts with the marginal willingness to supply at the lowest prices.

What is the deadweight loss of the policy?

What is the consumer surplus?

What is the producer surplus?

If you were to graph it, Does the total surplus decrease, increase or stay the same?

If you were to graph it, Does the consumer surplus increase, decrease or stay the same?

If you were to graph it, Does the producer surplus decrease, increase or stays the same?

Now, lets assume that thelicenses were allocated randomly among all potential party hosts rather than giving the licenses to those willing to supply at the lowest prices? (Assume that licenses cannot be resold.)

Will the Total Surplus increase, decrease or stay the same?

Which policy would potential party goers prefer?

-Tax policy

-License Policy

-Indifferent between both

Which policy would party hosts prefer?

-Tax policy

-License policy

-Indifferent between both

Which policy would the city government prefer?

-Tax policy

-License policy

-Indifferent between both

-Or would they prefer neither policy?