A local drama company proposes a new neighborhood theater in San Francisco. Befo

Question

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.

Explanation / Answer

A) The theater derives the benefit of the collecting revenue through tickets, while the community as a whole bears the burden of the increased traffic. It is a negative externality. B) The community derives benefit from increased safety without having to pay for it, or be a party to the transaction that caused it. It is a positive externality. C) Collecting $3 in tax from each ticket sale is most likely the answer your teacher is looking for. If it is then you can be sure he/she is a communist blood sucker and should be pushed off a subway platform at the earliest opportunity. In this context the "efficient outcome" is being used to justify a tax on the theater company by claiming that it has a net negative impact on the community. Rather than allow the theater company to retain the proceeds of it's labor and use them to create more negative externalities the city puts the money to good use for the collective benefit. In reality this solution mis-aligns the governments incentives with those of it's citizens. Ideally the tax revenue would be spent on the community, however there is no guaranty that this will be the case. In fact it may lead the city to approve of more theaters so it can collect more revenue at the expense of both the theater company and it's patrons.

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