No coffee is produced in the United States. Americans can buy as much coffee as they want from foreign producers at a price of $10 per pound. At this price, they buy 1,000 pounds per week. The U.S. government has decided to make coffee available to all U.S. citizens at a price of $3 per pound. It gets the coffee by purchasing it from foreigners.
a. Show the gains and losses to all relevant groups of Americans as a result of this program. Compute the deadweight loss.
b. True or False: The deadweight loss in this problem is entirely attributable to the fact that Americans consume an inefficiently large quantity of coffee.
c. Suppose that the government modifies the program. It will continue to sell coffee at $3, but will provide only 1,000 pounds per week, choosing randomly those citizens who are permitted to buy them. Recompute the deadweight loss by the methods of Chapter 8, and show that it is now zero.
d. What important social costs does the analysis of part (c) overlook?