A local drama company proposes a new neighbour hood theatre in San Francisco. Before approving the building permit, the city planner completes a study of the theatre’s impact on the surrounding community.
a. One finding of the study is that theatres 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. Describe a government policy that would result in an efficient outcome.
This is a kind of negative externality because it has an adverse effect on the society.
A government regulated tax of $5 would internalize the externality and result in a socially efficient output.