Question

Butchart Gardens is a very large garden in Victoria, British Columbia, renowned for its beautiful plants. It is so large that it could hold many times more visitors than currently visit it. The garden charges an admission fee of approximately \(\$ 30 .\) At this price, 1,000 people visit the garden each day. If admission were free, 2,000 people would visit each day. a. Are visits to Butchart Gardens excludable or nonexcludable? Are they rival in consumption or nonrival? What type of good is it? b. In a diagram, illustrate the demand curve for visits to Butchart Gardens. Indicate the situation when Butchart Gardens charges an admission fee of \(\$ 30 .\) Also indicate the situation when Butchart Gardens charges no admission fee. c. Illustrate the deadweight loss from charging a \(\$ 30\) admission fee. Explain why charging a \(\$ 30\) admission fee is inefficient.

Short answer

A visit to the Butchart Gardens represents a club good, as it is excludable and nonrival in consumption. The deadweight loss that arises from charging a $30 admission fee is due to the lost benefit that would have been enjoyed by those who would have visited the Gardens if the price were lower or free. This leads to a decreased total surplus and economic inefficiency, as the Gardens could have accommodated more visitors without increasing costs.

Step-by-step solution

Determine Excludability and Rivalry of Visits to Butchart Gardens

First, we need to evaluate whether visits to Butchart Gardens are excludable or nonexcludable, and whether they are rival in consumption or nonrival. Excludable goods can prevent people who don't pay for them from consuming the good. In this case, visits to Butchart Gardens can be considered excludable, as there is an admission fee and the management can prevent people who don't pay from entering the garden. Rival goods are those that, if consumed by one person, cannot be consumed by another person. Visits to Butchart Gardens are nonrival in consumption because the Gardens is very large and can hold a larger number of visitors than it currently has. Thus, one person's consumption (visit) does not significantly impact another's. Therefore, visits to Butchart Gardens are excludable and nonrival in consumption, making it a club good.

Illustrating the Demand Curve and Indicating Situations

Now, we will create a demand curve based on the given price and visitor data. At the price of \(\$30\), the Gardens receive 1,000 visitors. If admission were free, there would be 2,000 visitors. Let the vertical axis represent the price (P) and the horizontal axis represent the quantity of visitors (Q). 1. Plot the point (1,000, 30) on the graph, representing the situation of 1,000 visitors when the price is \(\$30\). 2. Plot the point (2,000, 0) on the graph, representing the situation of 2,000 visitors when admission is free. 3. Connect the two points to create the demand curve.

Illustrating Deadweight Loss and Explaining Inefficiency

Finally, we will calculate the deadweight loss of charging a \(\$30\) admission fee and explain why it is inefficient. 1. Draw a horizontal line at \(\$30\) to find the level of output where price equals marginal cost (efficient allocation). 2. Find the intersection point between the demand curve and the \(\$30\) line, and label it A. 3. Find the area of the triangle between point A, the \(\$30\) line, and the demand curve. This triangle represents the deadweight loss of charging the \(\$30\) admission fee. Charging a \(\$30\) admission fee is inefficient because it results in a deadweight loss. This means that there is a loss in total surplus (the total value to consumers minus total costs), representing the lost benefit that would have been enjoyed by those who would have visited the Gardens had the price been lower or free. With fewer visits, both the Gardens and potential visitors are not achieving the highest total overall satisfaction and economic efficiency, as the Gardens could have held many more visitors without increasing costs.

Key concepts

Excludability

Excludability refers to the ability to prevent people from using a good or service unless they pay for it. If you can stop someone from accessing the good because they haven't paid, then it is considered excludable.

In the case of Butchart Gardens, visits are excludable because there is an entrance fee. If someone doesn't pay the approximate $30 admission, they cannot enter the garden. This means the management has control over who accesses the garden, based on payment, which makes visits to Butchart Gardens excludable.

This is important because excludable goods often require a management system to enforce the access, which means there is typically an associated cost with providing and maintaining this exclusivity.

Rivalry in Consumption

Rivalry in consumption occurs when one person's use of a good diminishes the ability of others to use it. If a good is rival in consumption, it becomes less available or of lower quality as more people use it.

Butchart Gardens, however, is nonrival in consumption. This means that one person's visit does not prevent another's. The garden is spacious, and its capacity for visitors exceeds current visitor numbers. Therefore, an additional visitor does not hinder someone else's ability to enjoy the garden.

Understanding rivalry helps in determining how resources might be strained or maintained, and in this case, knowing the nature of rivalry ensures that the garden can welcome many visitors without diminishing the experience for anyone.

Club Goods

Club goods are a unique category of goods that are both excludable and nonrival in consumption. They are often characterized by the ability to prevent access and allow shared enjoyment without overcrowding concerns.

Visits to Butchart Gardens exemplify club goods. They are excludable due to the entry fee, ensuring only those who pay can enter. Yet, they are nonrival as the garden can accommodate more visitors without diminishing anyone's experience.

Club goods often involve some form of membership or access control, such as the garden's ticket system. This structure allows for sustainable management while ensuring maximum satisfaction for paying visitors, capitalizing on the property of nonrivalry while maintaining controlled access.

Deadweight Loss

Deadweight loss is an economic concept that refers to the loss of economic efficiency when the equilibrium for a good or service is not achieved. It occurs when the supply and demand balance is disrupted, leading to a loss in total potential welfare.

In the context of Butchart Gardens, charging a $30 admission fee creates a deadweight loss. This is because the fee prevents some potential visitors from entering, despite there being no congestion or depletion of resources. The garden receives 1,000 visitors at the $30 fee, but could accommodate 2,000 if it were free.

The area between the demand curve, the price line, and the potential free admission visits represents this deadweight loss. This indicates a missed opportunity for both the garden and visitors to maximize satisfaction and economic benefit, resulting in inefficiency as people who value the garden at less than $30 are excluded despite available capacity. This inefficiency reduces the total welfare and satisfaction the garden could potentially offer if the price were adjusted.