Question

This question is based on the current Covid-19 pandemic. Suppose the risk of being infected or infecting others while eating in restaurants is high. Consider the market for dine-in restaurant meals. Is there a discrepancy between the marginal private and social benefit (or cost)? Show on a graph the quantity of restaurant meals that would be sold and the quantity that would maximize economic surplus. Is there a discrepancy between the two? What solution do you think would be most appropriate to deal with this? What solution was taken by most governments? Do you agree with it or not?

Answer 1

Solution-

There is a negative externality associated with eating at dine in restaurants. The person coming in close association with the infected ones will have to bear that cost. Thus marginal social cost will be more than marginal private cost.

Marginal social cost= Marginal private cost+ marginal external cost.

Marginal external cost is the additional cost borne by those who get infected by getting in contact with Covid-19 patients in restaurant.

Here, efficient level of restaurant meals will be determined where marginal social cost is equal to marginal social/private benefit.

As it is evident from the figure, there is overproduction of restaurant meals. In order to maximize economic surplus the quantity produced or sold should be at Qe level, where marginal social cost equals marginal social/private benefit.

Government should impose a level of tax on restaurants so that production and sale of restaurant meals be reduced. We know that this virus spreads from person to person by contact. So in order to restrict the spread, government should ensure that minimum number of person should gather in such restaurants. The restaurant should maintain distance between the person and keep it's ambience hygienic and clean.