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The Parking Lot Problem

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Document pages: 38 pages

Abstract: Competition for access to an underpriced good such as a free parking spot can eat up its entire surplus, eliminating the social value of the good. There is a discontinuity in social welfare between enough and not enough, with the minimum social welfare at slightly too small a parking lot because of the rent-seeking efforts of drivers. Full rent dissipation occurs only when drivers have identical preferences, but allowing for heterogeneous preferences does not alter the conclusion that the welfare losses from undercapacity and overcapacity are asymmetric and that parking lots should be overbuilt. Furthermore, when it is chosen optimally under uncertainty, the parking lot size will be well in excess of mean demand, and may even be chosen to accommodate all potential drivers. Uncertainty over the number of drivers, which is detrimental in the first-best, actually increases social welfare if the parking lot size is too small.

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