Question

Question 2

Suppose there is enough room for a maximum of three (3) cars to park around a fire hydrant. The harm resulting to society rises as additional cars park around the fire hydrant. This is because as more cars park, it becomes more costly for firefighters to navigate their water hoses around the stationary vehicles. The total (not marginal) cost to society as a function of the number of parked cars around a fire hydrant is as follows:

Number of Parked Cars	Total Cost to Society
0	$0
1	$10
2	$25
3	$50

a. If each driver’s gain from parking a car around the fire hydrant is constant at $20, how many cars should park around the fire hydrant from an economic perspective? (Hint: you need to find the marginal cost to society to answer this part.)

b. What is the maximum level of total surplus resulting from parking around the fire hydrant? How many cars should park around the fire hydrant from an economic perspective?

Answer 1

Gain for each driver = $20

So, the marginal benefit to the society that is, the additional gain to the society by parking one more car is $20

Marginal cost is the additional cost to the society faces by parking one more car

No of cars	Total cost	Marginal cost	Marginal benefit	Total benefit	Total surplus
0	$0	$0	$0	$0	$0
1	$10	$10	$20	$20	$10
2	$25	$15	$20	$40	$15
3	$50	$25	$20	$60	$10

Total benefit = no of cars multiplied by $20 [Each car gives a marginal benefit of $20]

Total surplus = Total benefit - total cost

a. No of cars should be the level where marginal cost equals marginal benefit and where the total surplus is maximized.

Total surplus is maximum ($15) at 2 cars and at this level, marginal benefit is equal to marginal cost.

If we park one more car, the additional cost is $25 whereas the additional benefit is only $20. It will reduce total surplus.

Therefore, 2 cars should park around the fire hydrant.

b. From the above table, we can clearly see that the total surplus of the society is maximized when the no of cars parked is 2. Total surplus to the society at this level is $25.

Therefore, from an economic perspective, 2 cars should pe parked around the fire hydrant.