Externalities
Consider the following scenario: The city council has just approved the construction of an amusement park in your town. You are responsible for studying the impact of the new amusement park on the local economy and the surrounding community.
- Write a paper of approximately 500 words that addresses all of the questions below. Include the graphs, where indicated:
- Question 1: You know that the amusement park will increase the traffic flow in the streets around the amusement park. There are both businesses and neighborhoods adjacent to the increased traffic flow. The cost to the community is estimated to be $6 per person.
- What kind of externality is this? Why?
- Graph the market for amusement park business, labeling the demand curve, the social-value curve, the market equilibrium level of output, and the efficient level of output.
- What is the per-unit amount of the externality?
- Question 2. You know that the amusement park will have events in the evening. This will increase both foot traffic and street traffic at night. You believe this will improve the safety of the surrounding businesses, with an estimated benefit of $2 per park attendee. What kind of externality is this? Why?
- Question 3 Create a new graph illustrating the market for amusement park business for these two externalities together. Label the demand curve, the social-value curve, the market equilibrium level of output, and the efficient level of output.
- What is the per-unit amount of both externalities?
- Discuss both government and private solutions that would result in an efficient outcome.
- Question 1: You know that the amusement park will increase the traffic flow in the streets around the amusement park. There are both businesses and neighborhoods adjacent to the increased traffic flow. The cost to the community is estimated to be $6 per person.