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

Chapter 10, Problem Problems and Applications 10.4

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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 theaters 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 theper-unit amount of the externality.c. Upon further review, the city planneruncovers a second externality. Rehearsalsfor the plays tend to run until late at night,with actors, stagehands, and other theatermembers coming and going at various hours.The planner has found that the increasedfoot traffic improves the safety of thesurrounding streets, an estimated benefit tothe community of $2 per ticket. What kind ofexternality is this? Why?d. On a new graph, illustrate the market fortheater tickets in the case of these twoexternalities. Again, label the demand curve,the social-value curve, the supply curve, thesocial-cost curve, the market equilibriumlevel of output, the efficient level of output,and the per-unit amount of both externalities.e. Describe a government policy that wouldresult in an efficient outcome.