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Externalities

Excel Worksheet numbers needed.

  • Graphthe market for water 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?
    • You know that the water 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 $3 per water park attendee. What kind of externality is this? Why?
  • Create a new graph illustrating the market for water park business for these two externalities. 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

Impact of creation of a water park on the community around

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Ineconomics, an externality is used to refer to the cost or benefit that affectsa party who did not choose to incur that cost or benefit. T is a consequence ofan economic activity that is experienced by unrelated third parties. There aretwo types of externalities. They can be either positive or negative.

Forinstance pollution caused by a factory spoils the surrounding environment andaffects the health of nearby residents is an example of a negative externality.An example of a positive externality is the effect of a well-equipped andsatisfied labor force on the productivity of a company.

Despitethe positive view of the city council in creating the water park which willmean an increased surge of visitors and a corresponding surplus flow of income.The development brings about a negative externality since a burden of $6dollars is heaped upon each individual in the community. Traffic congestionwill mean delayed business transactions and other significant loses.

Ina competitive market, the supply curve represents the marginal private cost ofproducing a good for the firm (labeled MPC) and the demand curve represents themarginal private benefit to the consumer of consuming the good (labeled MPB).When no externalities are present, no one other than consumers and producers isaffected by the market.

Whena negative externality on production is present in a market, the marginalsocial cost and the marginal private cost are no longer the same. Therefore,marginal social cost is not represented by the supply curve and is insteadhigher than the supply curve by the per-unit amount of the externality.

Thecost of $6 per person in the community is a negative externality. This is anexternal costs caused by the building of the water park. This is a negativeexternality because it involves added costs to the community. Additionally, thepeople within the community where this park will be built are third parties anddo not incur costs or benefits directly (Keppler, 2007). These costs are notcompensated by the city council.

The per-unit amount of the externality is the amount of thepositive or negative externality realized for every unit of good produced bythe council.

In this case the product is the water park that willincrease the traffic. The negative per unit amount of externality is $3.

When businesses enjoy heightened security at night aswell as the community around, this will be a benefit from the water park. Also,with a benefit of $3 per every attendant to the park the positive extremity isrealized. This is a positive extremity since the city council will get norefund of the money or in any way the neighbors get to pay the extra benefitrealized from increased traffic and security at night.

Theper unit amount for both externalities is $2.

A sure way of solving the externalities of this projectis having the council cater for the increased cost to the community by cuttingdown some of its services to people. Else it should pay the community the sameamount of money. Therefore this can be added to the back to this marginal cost.The community can benefit by appealing for subsides from the city council. 

 

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