Quiz #3 (Answer Key)
ECNS 432
February 5, 2013
Name_________________________
Suppose the government has decided to increase the toll on a certain stretch of highway from
$0.40 to $0.50. Before the toll, 50,000 cars per week used the stretch of highway; after the toll,
only 40,000 cars per week have used the highway. Assume no externalities result from the
reduced use of the highway.
a.) (12 points) Assuming that the marginal cost of highway use is constant and equal to $0.40 per
car (i.e. the pre-toll MC), what is the net cost to society attributable to the increase in the toll?
Support your answer with a graph.
The net cost to society is the deadweight loss caused by the increased toll and the resulting fall in
the number of cars using the highway. The value of this DWL is (.5)(.5-.4)(50,000-40,000) =
$500. The increased toll paid by the remaining drivers, (.5-.4)(40,000), can be viewed as a
transfer from the drivers to the government.
a.) (8 points) Because of the reduced use of the highway, demand in the secondary market for
subway rides increases. Assuming that the price of subway rides is set equal to the marginal cost
of operating the subway and marginal costs are constant, and no externalities result from the
increased use of the subway, are there additional costs or benefits due to the increased demand
for subway rides? Why or why not?
No, there are no additional costs or benefits due to the increased demand for subway rides that
we would count in a CBA. Remember, we should ignore the impacts in secondary markets as
long as changes in social surplus in the primary market are measured and prices in the secondary
market do not change. For this specific example, consider first the people that were riding the
subway before the increase in the toll. Clearly, there is no change in surplus for these individuals
(obviously we are abstracting from any possible costs due to subway congestion). Second,
consider the people who switched over from using the highway to take the subway after the toll
was increased. The gap b/w the two demand curves in the secondary mkt. accurately reveals the
increased value these people place on the subway. But, just like the people who were already
riding the subway, the increase in CS these people receive from switching modes of
transportation is fully reflected by the primary market demand for highway use. Counting the
benefits in the secondary market would amount to “double counting.”