Question

Floyd Mayweather Jr. and Manny Pacquiao will fight tonight in Las Vegas in a match which people have been waiting for almost six years. The police said that there are concerns regarding illegal scalping of tickets and it would be monitored. Source: \(L A\) Times, May 2,2015 a. Draw a graph of the market for tickets sold by scalpers, assuming that there are no effective penalties on either buyers or sellers. b. If the police have caught the scalpers and 2,000 tickets have been seized, how would it change the market outcome? Show the effects in your graph. c. With no penalty on buyers, if a penalty for breaking the law is imposed on ticket scalpers at more than \(\$ 500\) a ticket, how does the market work and what is the equilibrium price? dith no penalty on sellers, if a penalty for breaking the law is imposed on buyers at more than \(\$ 500\) a ticket, how does the market work and what is the equilibrium price? e. What is the marginal benefit of a ticket bought from scalpers in the situations described in parts (c) and (d)? f. In light of your answer to part (e), why does law enforcement usually focus on sellers rather than buyers?

Short answer

When scalpers face penalties, prices rise due to decreased supply; when buyers face penalties, prices lower due to decreased demand. Law enforcement targets sellers to disrupt the supply side effectively.

Step-by-step solution

Draw Basic Supply and Demand Graph

Draw two axes. The x-axis represents the quantity of tickets, and the y-axis represents the price of tickets. Draw a downward-sloping demand curve (D) and an upward-sloping supply curve (S). The intersection of these curves is the equilibrium point (E) representing the initial equilibrium price and quantity without penalties.

Impact of Seizing Tickets

When the police seize 2,000 tickets, the supply curve shifts left from S to S1. This represents a decrease in the available tickets. Mark the new intersection of D and S1. This new intersection is the new equilibrium point (E1) showing a higher equilibrium price and a lower equilibrium quantity.

Penalty on Scalpers

If scalpers face a penalty greater than \(\$500\) per ticket, the cost of selling tickets illegally increases. As a result, the supply curve will further shift left from S1 to S2. Draw the new supply curve S2. The new intersection of D and S2 represents the new equilibrium, denoted as E2, with a higher price and lower quantity compared to E1.

Penalty on Buyers

If buyers face a penalty greater than \(\$500\) per ticket, the demand for tickets decreases because buyers are less willing to purchase them. The demand curve shifts left from D to D1. Draw the new demand curve D1. The intersection of D1 and S1 represents the new equilibrium, denoted as E3, with a lower equilibrium price and quantity compared to E1.

Marginal Benefit of Tickets

In scenario (c) where scalpers face penalties, the margin cost of supply increases, leading to tickets being priced higher. In scenario (d) where buyers face penalties, the marginal benefit diminishes since the perceived cost of purchasing a ticket includes the penalty. Therefore, tickets have a lower value or benefit to buyers.

Law Enforcement Focus

Law enforcement usually focuses on sellers rather than buyers because disrupting the supply (sellers) can be more effective in diminishing the overall market for illegal tickets. Also, penalizing buyers can be socially unpopular and harder to enforce on a large scale.

Key concepts

Supply and Demand

The foundation of any market system is the concept of supply and demand. Supply represents how much of a product is available, while demand shows how much of the product people want at various price points. The supply curve slopes upward, indicating that higher prices incentivize producers to supply more. Conversely, the demand curve slopes downward, showing that lower prices make the product more attractive to buyers. When these two curves intersect, we get the equilibrium where the quantity supplied equals the quantity demanded. This balance ensures that the market operates efficiently.
In our exercise, the initial supply and demand graph reflects this basic principle. Both the buyers and sellers interact in a free market without any penalties, setting the stage for a natural equilibrium price and quantity for the tickets to Mayweather vs. Pacquiao event.

Market Equilibrium

Market equilibrium is a state where the supply of a product perfectly matches its demand. At this point, the market is in balance, and there is no pressure to change the price.
In the context of the boxing match, the equilibrium was initially set without any penalties. This means that scalpers were able to sell and buyers were ready to purchase tickets at a specific price where both parties agreed. However, external interventions, such as legal enforcement, can shift this equilibrium, leading to different market outcomes, as illustrated in steps 2 through 4 of the solution.

• Seizing tickets: Shifts the supply curve left, leading to higher prices.
• Penalties on scalpers: Further reduces supply, increasing prices.
• Penalties on buyers: Decreases demand, lowering prices.

Law Enforcement in Economics

Regulation and law enforcement play significant roles in economic markets. Governments often intervene to correct market failures, prevent illegal activities, or protect consumers and businesses.
In our exercise, law enforcement intervenes to prevent illegal scalping. This involvement changes the dynamics of the market. For instance, the act of seizing 2,000 tickets by the police shifts the supply curve, leading to fewer available tickets and a hike in prices. Similarly, imposing penalties on scalpers discourages illegal sales by increasing their costs, while penalties on buyers reduce the demand as the risk associated becomes higher. These measures are a way to control market behavior and ensure legal compliance.

Penalty Impact on Markets

Penalties, whether imposed on sellers or buyers, significantly influence market operations. They introduce additional costs or risks that shift the standard supply and demand scenarios.
For scalpers facing penalties above $500, the supply curve shifts leftward because the risk of being penalized raises their operating costs. They are less willing to supply tickets at previous prices. On the other hand, if the penalty is on buyers, the demand curve shifts leftward. Buyer apprehension reduces the willingness to purchase tickets at previous prices, decreasing overall demand.

• Higher penalties on scalpers = Decreased supply = Higher prices.
• Higher penalties on buyers = Decreased demand = Lower prices.

Marginal Benefit Analysis

Marginal benefit refers to the additional satisfaction or value obtained from consuming one more unit of a product. In our exercise, we analyze the marginal benefit for buyers in scenarios with different penalties.
When scalpers face higher penalties, the marginal cost for them rises, which typically translates to higher ticket prices for buyers. Thus, the benefit derived from each ticket diminishes because buyers have to pay more while getting the same entertainment value. Conversely, when penalties are imposed on buyers, the overall perceived value or benefit of purchasing a ticket decreases due to the associated risk of penalties. Therefore, marginal benefit analysis helps us understand why buyers or sellers react differently under different market penalties and interventions.