Question

A local drama company proposes a new neighborhood theater in Seattle. Before approving the permit, the city planner completes a study of the theater's impact on the surrounding community a. One finding of the study is that theaters attract traffic, which adversely affects the community. The city planner estimates that the cost to the community from the extra traffic is $5 per ticket. What kind of an externality is this? (5 pts) b. Graph the market for theater tickets, labeling the demand curve, the social value curve, the supply curve, the social cost curve. Show the market equlibrium level of output, and the efficient level of output. Also make sure to show the externality on your graph. (5 pts) c. Upon further review, the city planner uncovers a second externality. Rehearsals for the plays tend to run until late at night, with actors, and stagehands coming and going at various hours. The planner has found that the increased foot traffic improves the safety of the surrounding streets, an estimated benefit to the community of $2 per ticket. What kind of externality is this? (5 pts) d. Describe a government policy that would result in an efficient outcome. (5 pts)

Answer 1

Answer: @) The city planner estimated that the cost to the Community from the extra tariff is 85 per ticket. The kind of externality is: - This is a negative Externality of the increase in traffic will lead to more pollution in the area, increased traffic, decreased in quality of roads of more cars are driving across it, and an increase in trash of there will be more people in the area. • All of these things decrease the quality of life in the Community (6) Graph of market for theater tickets ; Social ial se Scy Exte External cost (85) . . pl Cost Price Private cost ticketers - pemand and Quantity of Ticketers.

(c) If planner found that the increased food traffic importones safety of the surrounding streets, an estimated benefit the to the community of $2 per ticket, kind of externality is: > An externality that provides benefit to society benefit "A fim is not feim borsed by the state for this spill over effect but society is often better off because of it... • to correct this externality', the demand are should shift to include this in the benefits This will cause the price to sise because consumers should be more willing to pay for the increase in benefit. Notice that this does not cause time to change their ability to supply; their cost do not change. d) The government policy that result in efficient outcome : » External cost - internal value = 85-$2 = 83. The equilibrium point)