Chapter 74, Problem 2CYU

To determine

Whether Y's economic reasoning correct when she failed to return the library book on time which imposes a negative externality on other students and she claimed that the library should

charge a huge fine rather than charging a modest fine for late returns, so that borrowers will never return a book late.

Explanation of Solution

No, Y’s economic reasoning is not correct because it is socially optimal if students occasionally fail to return the book on time and by allowing some to be late then there would be a marginal social cost on others every day if Y is late to return the book, but there is also some positive marginal social benefit to Y. Therefore, Y's economic reasoning is incorrect. She may have more time to use the book for research, education, or enjoyment if she returned it late. The social benefit of Y is therefore equal to the number of days (social cost) that a book is returned after its due date, and in this case, the marginal social benefit is equal to the marginal social cost.

Furthermore, in this situation, allowing the overdue patron to return the book another day would increase the total social benefit more than the total social cost. As a result, it would be appropriate to charge a reasonable fine that aids the library in reducing the number of days that the book can be returned late in accordance with the socially optimal number of days.

Economics Concept Introduction

Introduction: When a decision is made by comparing the costs and benefits of any situation, it is called economic reasoning.