Problem
A. The city planner looks deeper into the effect of the theater. The theater holds rehearsals in the evening that often go late into the night. This means that actors, set hands, and other participants will be coming and going at all hours. This extra presence in the neighborhood is expected to reduce crime. The reduction in crime is valued at $2 per ticket. [assume the theater is sound-proof so the late rehearsals do not create added noise] What kind of externality is this?
B. Graph the new market for theater tickets including both the effects of traffic and crime reduction. Label demand and supply curves as well as the social curves and the externality. Also, label the market equilibrium and the new efficient level of output.
C. Considering all the information, should the city planner allow the theater? Should they consider subsidizing the activity or placing a tax on the tickets?