Problem
A company proposes a new neighborhood hotel in San Francisco. Before approving the permit, the city planner completes a study of the hotel's impact on the surrounding community.
1. The hotel will increase traffic due to hotel guests traveling to and from the hotel which has a cost to the community equal to $5 per hotel guest night. What kind of externality is this? Explain.
2. The hotel will operate late at night with hotel employees coming and going at various hours which improves the safety of the community with an estimated benefit of $2 per hotel guest night. What kind of externality is this? Explain.
3. Given the market for hotel guest nights in the presence of these two externalities, is the market equilibrium level of hotel guest nights going to be larger or smaller than the efficient level of hotel guest nights? Explain.
4. Suggest a government policy that would result in an efficient outcome. Explain.