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Principles of Microeconomics
Principles of Microeconomics, 1st Canadian Edition
Robert H. Frank, Cornell University
Ben S. Bernanke, Princeton University
Lars Osberg, Dalhousie University
Melvin Cross, Dalhousie University
Brian MacLean, Laurentian University
Public Goods and Taxation

Practice Activity 2

 
Lost Economic Surplus
The demand for pay-per-view movies is described by the equation
P = 30 – 2Q
where Pº people's willingness to pay for movies each month
whereQº how many movies people are willing to watch per month.
Once the broadcasting system has been established, the marginal cost of adding more viewers is zero.

  1. What is the socially optimal amount of movies for households to watch each month?

  2. The broadcasting company wishes to exclude viewers who have not paid to watch the movies. It institutes a monthly fee of $10. How many movies will households watch now?

  3. How much economic surplus is lost because the broadcasting firm instituted the $10 fee?

See our suggested answer for this activity.

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