The Parking Lot Problem

If there is competition for access to an underpriced good such as a free parking spot, the competition can eat up the 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 being at slightly too small a parking lot because of the rentseeking efforts of drivers. Uncertainty over the number of drivers actually increases social welfare if the parking lot size is set too small; if it is set optimally, the parking lot size will be well in excess of mean demand.