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Economics theory

Consider the following: The city council has just approved the construction of a water park in your town. You are responsible for studying the impact of the new water park on the local economy and surrounding community.

You know that the water park will increase the traffic flow in the streets around the water 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 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 also 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.

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