Answer to Question #258664 in Microeconomics for Somu

Question

The park service wants to limit the number of visitors to Bhitarkanika National Park in Odisha to Q*, which is less than the current volume, Qo. It considers two policies: (a) raising the price of admissions and (b) setting a quota. Compare the effects of these two policies on consumer surplus, producer surplus, and welfare. Use a graph to show which policy is superior according to the welfare criterion.

Answer 1

Two policies are being used by the park service to limit the number of visitors:

A) By increasing the price of admissions: this strategy involves boosting the admission cost in order to reduce the number of people that visit the park. The initial equilibrium and increased price impacts are depicted in the graph below:

Table below shows the change in surplus before and after the price rise:

Hence, it will lead to loss in total welfare.

B) The second policy to restrict the visitors is setting up of quota. It means the supply is restricted at the given level of output. Following is the graph showing effects of quota:

Table below shows the change in surplus before and after the price rise:

Hence, it will lead to loss in total welfare.    

Both the policies lead to rise in price to restrict the visitors. The only difference is the way of restricting prices. Both the option produces deadweight losses or loss in total welfare of the economy.