A local drama company proposes a new
neighborhood theater in San Francisco. Before
approving the building 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? Why?
b. Graph the market for theater tickets, labeling
the demand curve, the social-value curve,
the supply curve, the social-cost curve, the
market equilibrium level of output, and the
efficient level of output. Also show the
per-unit amount of the externality.
c. Upon further review, the city planner
uncovers a second externality. Rehearsals
for the plays tend to run until late at night,
with actors, stagehands, and other theater
members 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? Why?
d. On a new graph, illustrate the market for
theater tickets in the case of these two
externalities. Again, label the demand curve,
the social-value curve, the supply curve, the
social-cost curve, the market equilibrium
level of output, the efficient level of output,
and the per-unit amount of both externalities.
e. Describe a government policy that would
result in an efficient outcome.