Consider the market for whale watching boat rides in Tofino, British Columbia. In this market, the whale watching boat drivers are producers and the whale watching riders are consumers. The demand curve and supply curves in the market for whale watching rides are given by
Demand: P = 10 - 0.5Q Supply: P = 0.5Q
(i) Find the equilibrium price and quantity in the market for whale watching rides.
(ii) Calculate the consumer surplus and producer surplus in the market for whale watching rides. Sum consumer and producer surplus to get the total surplus in the market for whale watching rides.
Assume now that the government in Tofino imposes a quota of 8 rides per year. To implement this quota, the government requires that drivers to purchase an operating license that allows them to build and operate a whale watching boat.
(iii) Calculate the price that consumers will be charged per ride if they purchase only 8 rides per year. Calculate the price producers must received in order to be willing to sell 8 rides. Use this information to calculate how much the government can charge drivers (per ride) for the right to operate a whale watching boat (this is called a quota rent).
(iv) Calculate the consumer surplus, producer surplus, and the total quota rent. Compare the sum with the total surplus of the market you obtained in part (ii). Is this policy desirable from an efficiency standpoint? Explain your answer.