Scenario 11.1: Mariana has decided that she would like to build a private electric railway that would directly connect her small town to her favorite casino 75 miles away. She discovers that to build her railway, she will need to purchase an equal amount of land from 5 ranchers: Abe, Ben, Cat, Don, and Eve. Mariana believes that the revenue she would receive from running the railroad would be enough to cover all of her construction costs and leave her $3 million to buy the land. Mariana calculates the land she needs to build the railway will cost her $2 million.
-Refer to Scenario 11.1. Suppose all five ranchers know that Mariana has $3 million to spend on their land and they also know that their land that Mariana needs is worth a total of $2 million. Each rancher believes that one or more of the other ranchers will settle for less than the maximum value of their land and therefore each decides to ask Mariana to pay $750,000 for their parcel of land. The logical outcome in this situation is for the railway ________ , and the benevolent social planner is ________.
A) to be built; pleased
B) to be built; indifferent
C) not to be built; unhappy
D) not to be built; indifferent

Question

Quizplus · Accepted Answer

The total cost demanded by the ranchers exceeds Mariana's budget ($3.75 million vs. $3 million), making it impossible for her to afford the land for the railway. This outcome is inefficient and undesirable from a social planner's perspective, who would prefer that resources be used in a way that benefits society, such as by building the railway.