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In the land of Nod, everyone is identical. Each day, 100 people wait in line each day to buy peanuts at a controlled price. One day the government announces that henceforth it will provide a free cup of coffee to each person in line. It costs the government $1 per cup to produce that coffee. The people in line value the coffee at 75 cents per cup. What is the social cost of providing that free coffee? | The social cost of an action is the total cost to society. It often includes both the direct costs of providing a good or service and any externalities (positive or negative) that may arise. In this case, the good being provided is coffee. Given that the government spends 100 per day. The people value the coffee at 75 cents per cup. Since utility or value is subjective and varies from person to person, in a scenario where everyone is identical (as is the case in the land of Nod), we assume each person assigns the same value to the coffee. Therefore, for 100 people, the total value they assign to the coffee is $75 (75 cents x 100 people). However, when estimating social cost, we consider the cost of providing the service against the value it provides to recipients. Here, the government's expenditure (the actual cost) is 75 in total. The discrepancy does not directly factor into the calculation of social cost in conventional terms, which primarily concerns with cost to produce and externalities. Since the question does not mention any externalities (positive or negative impacts beyond the transaction between the government and the people), we would focus on the direct cost of production here. Thus, the direct social cost of providing the coffee is the government's cost, which is 100 per day given the absence of mentioned externalities. |
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"content": "The social cost of an action is the total cost to society. It often includes both the direct costs of providing a good or service and any externalities (positive or negative) that may arise. In this case, the good being provided is coffee.\n\nGiven that the government spends $1 per cup for 100 people, the direct cost of providing the coffee is $100 per day.\n\nThe people value the coffee at 75 cents per cup. Since utility or value is subjective and varies from person to person, in a scenario where everyone is identical (as is the case in the land of Nod), we assume each person assigns the same value to the coffee. Therefore, for 100 people, the total value they assign to the coffee is $75 (75 cents x 100 people).\n\nHowever, when estimating social cost, we consider the cost of providing the service against the value it provides to recipients. Here, the government's expenditure (the actual cost) is $100, but the people value it less than that, at only $75 in total. The discrepancy does not directly factor into the calculation of social cost in conventional terms, which primarily concerns with cost to produce and externalities. Since the question does not mention any externalities (positive or negative impacts beyond the transaction between the government and the people), we would focus on the direct cost of production here.\n\nThus, the direct social cost of providing the coffee is the government's cost, which is $100. The consideration that people value it less doesn't technically reduce the government's expenditure or the direct cost but instead highlights a potential inefficiency or misallocation of resources where the cost exceeds the perceived value. Nonetheless, in terms of calculating a direct social cost here, it's $100 per day given the absence of mentioned externalities."
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