South-Western College Publishing - Economics  
Messing About On the River
Subject Externalities
Topic Government and the Economy
Key Words Social costs, tax
News Story

Accidents on waterways are increasing at a fast rate. In 1999, there will be approximately 8,000 accidents, up approximately 33 percent from six years ago. The fundamental cause is that there are many more boats today than in the past, caused by a strong economy and the elimination of a 10-percent tax on boats priced over $100,000. Also, people are buying bigger boats than before. More boats mean that waterways are crowded and water rage results.

In addition, problems result from drunk boating and inexperienced and uneducated boat users. In most states, licenses are not required: even children can drive boats. The U.S. Coast Guard has cut its staff and its expenses, making policing of boat traffic more difficult.

As a result, some harbors are increasing their patrols and sobriety checks. Certain states are considering requiring licenses and liability insurance. However, there is concern that additional regulations may deter tourists.

(Updated November 1, 1999)

1. a. Draw a diagram showing the marginal private costs and benefits of boats. Mark the private equilibrium.
  b.The news story states that the number of boats is causing what economists term negative externalities. List all the negative externalities that you can identify in the news story.
  c. How would negative externalities be represented in your diagram? Illustrate. Show how the negative externalities would affect the equilibrium number of boats if they were to be taken into account in the boat market.
2. The problems associated with boating have worsened of late. Draw new diagrams of the market for boats comparable to that above and show (i) how the curves have shifted, (ii) how the private equilibrium has changed, and (iii) how the social costs have risen due to:
  a. lower taxes on boats
  b. the strong economy
3. Various steps, such as educating boat users, requiring licenses, and increasing patrols, are being taken in some areas to reduce the negative externalities. Draw a further diagram and represent the intended effect of the policies. Explain why you shifted the curve(s) you did, and what happened to the social equilibrium as a result.
Source Nancy Keates, "No Smooth Sailing," The Wall Street Journal, August 27, 1999.

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