Question 1: Efficiency and Equity of Ride matching Consider the following potential riders and drivers. Each rider has a maximum willingness to pay for a ride. Each seller has a reservation price, a price below which he or she would not be willing to supply a ride. For this question, you will investigate the efficiency of the free market outcome compared to an alternative outcome designed to be more equitable. Name Amy Willingness-to-Pay Name Bernie 8 Doug 10 Christy 6 Riders 4 Emma 2 Show Transcribed Text Drivers Reservation Price Zack 9 Yoko 7 Xander 5 Victor Winona 3 |1 c) Suppose that you are an all-knowing, all-powerful social planner. Your task is to make sure everyone gets where they need to go and that all drivers contribute to the greater good. Is there a way you can match buyers and sellers, so that every rider gets matched with a driver, and the benefits outweigh the cost for every ride? If so, how would you match riders and drivers? You can relax the assumption that all transactions happen at a single price. Instead assume that each transaction happens at a price between the rider's willingness-to-pay and the driver's reservation price. d) What would be the total surplus generated by your proposed arrangement in part c)? Does this outcome achieve allocative efficiency? Distributive efficiency? Pareto efficiency? Explain your answer for each definition of efficiency. e) Do you think that the outcome in part c) is more equitable than the free market outcome? Why or why not? Consider the perspectives of Emma and Amy in your response.
Question 1: Efficiency and Equity of Ride matching Consider the following potential riders and drivers. Each rider has a maximum willingness to pay for a ride. Each seller has a reservation price, a price below which he or she would not be willing to supply a ride. For this question, you will investigate the efficiency of the free market outcome compared to an alternative outcome designed to be more equitable. Name Amy Willingness-to-Pay Name Bernie 8 Doug 10 Christy 6 Riders 4 Emma 2 Show Transcribed Text Drivers Reservation Price Zack 9 Yoko 7 Xander 5 Victor Winona 3 |1 c) Suppose that you are an all-knowing, all-powerful social planner. Your task is to make sure everyone gets where they need to go and that all drivers contribute to the greater good. Is there a way you can match buyers and sellers, so that every rider gets matched with a driver, and the benefits outweigh the cost for every ride? If so, how would you match riders and drivers? You can relax the assumption that all transactions happen at a single price. Instead assume that each transaction happens at a price between the rider's willingness-to-pay and the driver's reservation price. d) What would be the total surplus generated by your proposed arrangement in part c)? Does this outcome achieve allocative efficiency? Distributive efficiency? Pareto efficiency? Explain your answer for each definition of efficiency. e) Do you think that the outcome in part c) is more equitable than the free market outcome? Why or why not? Consider the perspectives of Emma and Amy in your response.
Chapter18: Asymmetric Information
Section: Chapter Questions
Problem 18.7P
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Transcribed Image Text:Question 1: Efficiency and Equity of Ride matching
Consider the following potential riders and drivers. Each rider has a maximum willingness to pay for a ride. Each seller has
a reservation price, a price below which he or she would not be willing to supply a ride. For this question, you will
investigate the efficiency of the free market outcome compared to an alternative outcome designed to be more
equitable.
Name
Amy
Willingness-to-Pay Name
10
Bernie 8
Christy 6
Riders
Doug 4
Emma 2
Show Transcribed Text
Yoko
Zack 9
Drivers
Reservation Price
Victor
7
LO
Xander 5
Winona 3
1
c) Suppose that you are an all-knowing, all-powerful social planner. Your task is to make sure everyone gets where they
need to go and that all drivers contribute to the greater good. Is there a way you can match buyers and sellers, so that
every rider gets matched with a driver, and the benefits outweigh the cost for every ride? If so, how would you match
riders and drivers? You can relax the assumption that all transactions happen at a single price. Instead assume that each
transaction happens at a price between the rider's willingness-to-pay and the driver's reservation price.
d) What would be the total surplus generated by your proposed arrangement in part c)? Does this outcome achieve
allocative efficiency? Distributive efficiency? Pareto efficiency? Explain your answer for each definition of efficiency.
e) Do you think that the outcome in part c) is more equitable than the free market outcome? Why or why not? Consider
the perspectives of Emma and Amy in your response.
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