Every Friday night, a student group at the Art Institute presents a film show in

Question

Every Friday night, a student group at the Art Institute presents a film show in the school’s auditorium. Every Friday night, 200 students attend. The cost of showing the film is unaffected by the number of students present, and there are always empty seats in the auditorium. No tickets are sold for admission. Instead, a collection box is placed near the door, and each student who attends is asked to put $1 in the collection box on the way in. One of the members of the student group discovers that only 100 people are paying to see the film each Friday, while the other 100 are watching the movie for free. She suggests that the student group instead monitor people as they arrive at the auditorium, and only let those who pay a dollar enter. The opportunity cost of doing this would be zero because the members of the student group are there to watch the movie anyway. After implementing the new policy, it is discovered that only 150 people attend each Friday. However, all 150 pay their dollar.

a. Is it efficient (i.e., does it increase total surplus) to monitor the entrance and make people pay? Consider the effect on both producer and consumer surplus. Explain how you arrived at your answer

b. Suppose the marginal cost of each attendee (in terms of additional cleaning required and wear and tear) is $1 rather than 0. Does your previous answer change?

c. A student group at the nearby Devrrie Institute shows a movie every Saturday night, and gets attendance of 200 as well. The Devrrie students are very careful, and so no cleanup is required or wear and tear results—marginal cost per attendee is always 0. The Devrrie student group has always used the Art Institute’s old policy of requesting that each member of the audience put one dollar in the collection box on the way in. However, one Saturday, the group’s chairman does a quick count before the movie starts and discovers that only 100 of the 200 in attendance have paid. She then announces that anyone who wants to watch the move must pay $1 then and there, regardless of whether they have already paid or not. In response, a member of the audience shouts out:

“Your new policy is inefficient (will reduce total surplus) because we honest people who have already paid will end up paying twice as much as with the original situation.”

Is the complaining member of the audience correct about the inefficiency? Explain your answer.

Explanation / Answer

a. The cost of showing the film is not effected by the attendees and hence when the entrance is monitored there is a surplus for both the producers as they are getting 1 dollar from extra 50 students ( who were not paying any money before) and since these students are willing to pay that extra 1 dollar therefore it creates a extra value (total surplus) of $50 and hence monitoring of entrance is effective.

b. If the marginal cost of each attendee is $1 instead of $0 then entering more people will cost more money and hence the process of monitoring attendees become more effective then previous case.

c. Yes the complaint made by the audience is correct because in this case the consumer surplus becomes -100 and the producer surplus is +50 therefore the net surplus will becomes equals to -50 and hence the total surplus decreases in this case.

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