Question

case file #5: the street musician
a talented guitarist plays music on the sidewalk outside a busy shopping district.
shoppers enjoy the free entertainment, and local businesses report that the music
creates a pleasant atmosphere that encourages people to stay longer and shop more.
the musician only collects voluntary donations.
analysis:
type of externality: positive / negative (highlight one)
who creates the externality?

whos affected and how?

market failure: is too much or too little street music happening? explain why.

policy solution: suggest one realistic way to fix this market failure.

Explanation:

• Type of externality: Positive. The guitarist's music benefits shoppers (free entertainment) and local businesses (more shopping due to longer stays) without them directly paying for this benefit.
• Who creates the externality: The street musician. By playing music, they generate a positive spill - over effect.
• Who's affected and how: Shoppers are affected as they get free entertainment. Local businesses are affected as the pleasant atmosphere (due to music) encourages people to stay longer and shop more.
• Market failure: Too little street music. Since the musician only gets voluntary donations, they may not be fully compensated for the benefits (to shoppers and businesses) they create. So, they may produce less music than the socially optimal level (where the marginal social benefit equals the marginal cost of producing music).
• Policy solution: Local businesses could form an association and pay the musician a fixed amount (based on the extra revenue they expect from the music - induced longer shopping stays). This would increase the musician's incentive to play more music.

Answer:

• Type of externality: Positive
• Who creates the externality: The street musician
• Who's affected and how: Shoppers (free entertainment), local businesses (more shopping due to longer stays)
• Market failure: Too little street music (under - compensation for positive externalities leads to under - production)
• Policy solution: Local businesses association pays the musician (based on expected extra revenue from music - induced shopping)