The University of Rochester has a fixed number of parking spaces for students on campus. They are currently sold at a price that clears the market. It has been proposed that the price should be lowered and a lottery held to determine who may park on campus. Each winner of the lottery would receive a ticket entitling him to purchase a parking space, and these tickets could be freely bought and sold. The number of winners would be equal to the number of parking spaces.
a. Graph the supply and demand for parking spaces. Show on your graph the price of a ticket. Show the consumers' surplus (earned by parkers), the producers' surplus (earned by the university), and the total value of the tickets to the winners of the lottery. Who gains, who loses, and who is unaffected if this plan is adopted?
b. The nearby University of Retsehcor is identical to the University of Rochester in every way except two. First, nobody at Retsehcor has proposed a lottery plan as at Rochester. Second, someone at Retsehcor has proposed that the university hold a lottery and give cash gifts to randomly chosen students. (An alternative proposal is to simply randomize tuition.) Compare the effects of the Retsehcor plan with those of the Rochester plan.
c. An alternative proposal at the University of Rochester would institute the lottery without allowing the resale of tickets. The university would carefully monitor compliance, expelling any lottery winner who allowed his parking spot to be used by anybody else. How would this revision affect welfare if the enforcement mechanism were successful? If it were unsuccessful?