Act I

The Smith Family owns all the land around 100-acre Dismal Lake and build its home on the eastern edge of the lake.Life is very pleasant for the first year.Then, unknown to Mama and Papa Smith, the Smith children begin throwing the family garbage in the lake when they take it once a week, because this is easier than carrying the bags all the way to the road for the County trash trucks to pick up.After a few months, the lake begins to stink, and Mama and Papa Smith discover where the garbage has been going.The Smith children are now dismal because they must clean up the lake instead of going out with their friends for the next four weekends.

Questions:

Only the Smith family lives on the lake.

1) Is there an externality problem (are any costs imposed on others outside the family) when the children throw the trash in the lake? Click here to enter text.

2) How should this problem be solved? Click here to enter text.

Act II

When the Smith children go to college, Mama and Papa Smith sell all the land around Dismal Lake except for their 1-acre homestead to a man named Snively Whiplash.Whiplash builds a home on the western edge of the lake and immediately starts throwing garbage into the lake instead of taking it out to the road for the county trash service.

Questions:

Now, both the Smiths and Whiplash live on Dismal Lake.

1) Is there an externality problem when whiplash throws garbage into the lake? Click here to enter text.

2) How should this problem be resolved? Click here to enter text.

Act III

One year later, Whiplash, who turns out to be an unscrupulous land developer, stops throwing trash in Dismal Lake and cleans it up.Then he subdivides the land, sells homestead plots to 15 families for $100,000 each and moves away.The 15 new owners build large houses on their lots.After a few months, garbage shows up on and around Dismal Lake again!This time from two or more unidentified families.

The Smiths call a neighborhood meeting to discuss the problem.At the meeting, four families accuse five other families of throwing garbage into the lake.The accused families deny the charges and accuseother families.The meeting breaks up with everyone shouting at each other.Dismal Lake continues to be a smelly, dismal place.

Questions:

Now 16 families live on the lake.

1) Is there an externality problem when some unidentified families throw garbage into the lake? Click here to enter text.

2) How can this problem be solved? Click here to enter text.