Question: Cultural influences often create externalities, for good and ill. A happy movie might make people smile more, which improves the lives of people who don't see the movie. A fashion trend for tight-fitting clothing might hurt the body image of people who think they won't look good in the trendy clothing. Let's consider the market for one cultural good that unrealistically raises expectations about the opposite sex: the romance novel. In romance novels, men are dangerous yet safe, they are wealthy yet never at work, they ride high-speed motorcycles yet never get in terrible accidents, they look fantastic even though they never waste endless hours at the gym, and so on. (Of course, advertising that focuses on sexy female models may also unrealistically raise expectations about the opposite sex so feel free to change our example as you see best.)
a. Consider the following market. Romance novels impose an external cost on men, who have to try to live up to these unrealistic expectations. Illustrate the effect of this external cost in the figure.
b. Illustrate in the figure the deadweight loss from the externality, before a tax or other solution is imposed.
c. If the government decides to compensate for the externality by imposing a tax on romance novels, should the tax be high enough to stop everyone from reading the novels? Why or why not?
d. Show graphically how big the tax should be per novel.
e. As long as the government spends the money efficiently, does it matter what the government spends the money from the "romance novel tax" on? In other words, could the government just use the money to pay for necessary roads and bridges, or does it need to spend the money to fix the harmful social effects of romance novels?