A local theater company wants to open a community theater in a residential neighborhood in Denver. The city planner studies the impact of the theater before deciding whether or not to approve the plan.

1. One finding is that the theater will create more traffic in the neighborhood. They estimate the cost of extra traffic to be $1 per ticket . What kind of externality is this? 2. Graph the market for theater tickets, label demand and supply curves as well as the social curves and the externality. Also label the market equilibrium and the efficient level of output. 3. 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? 4. 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. 5. Considering all the information, should the city planner allow the theater? Should they consider subsidizing the activity or place a tax on the tickets