A.Using a demand and supply framework, explain why governments subsidize university education. (4 marks)

B. A local drama company proposes a new neighbourhood theatre in Vancouver. Before approving the building permit, the city planner completes a study of the theatre's impact on the surrounding community. (16 marks)

a. One finding of the study is that theatres attract traffic, which adversely affects the community. The city planner estimates that the cost to the community from the extra traffic is $5 per ticket. What kind of an externality is this? Why?

b. Graph the market for theatre tickets, labelling the demand curve, the social-value curve, the supply curve, the social-cost curve, the market equilibrium level of output, and the efficient level of output. Also show the per-unit amount of the externality.

c. On further review, the city planner uncovers a second externality. Rehearsals for the plays tend to run until late at night, with actors, stagehands, and other theatre members coming and going at various hours. The planner has found that the increased foot traffic improves the safety of the surrounding streets, an estimated benefit to the community of $2 per ticket. What kind of externality is this? Why?

d. On a new graph, illustrate the market for theatre tickets in the case of these two externalities. Again, label the demand curve, the social-value curve, the supply curve, the social-cost curve, the market equilibrium level of output, the efficient level of output, and the per-unit amount of both externalities.

e. Describe a government policy that would result in an efficient outcome.