Question

The city of Falls Church, Virginia, subsidizes the planting of trees in homeowners' front yards when they are within 15 feet of the street. a. Using concepts in the chapter, explain why a municipality would subsidize planting trees on private property, but near the street. b. Draw a diagram similar to Figure \(16-4\) that shows the marginal social benefit, the marginal social cost, and the optimal Pigouvian subsidy on planting trees.

Short answer

Answer: The municipality provides subsidies for planting trees on private property near the street to internalize the positive externalities associated with tree planting, such as cleaner air, aesthetically pleasing neighborhoods, and potentially higher property values. These benefits are experienced by the entire community, not just the individual homeowner. The optimal Pigouvian subsidy should be equal to the difference between the marginal social benefit (MSB) and the marginal social cost (MSC) at the socially optimal quantity of trees (Qs), which can be determined by the intersection point of the new MSC curve and the MSB curve. This subsidy encourages homeowners to plant more trees, shifting the equilibrium from the private market quantity (Qp) to the socially optimal quantity (Qs), resulting in greater benefits to the entire community.

Step-by-step solution

In this situation, the municipality is providing subsidies for planting trees in the front yards, close to the street. We must understand that planting trees have positive externalities, which means that there are benefits experienced by third parties that are not directly involved in the transaction. The municipality wants to incentivize homeowners to plant more trees because this leads to positive externalities like cleaner air, aesthetically pleasing neighborhoods, and potentially higher property values. #Step_2# - Analyzing the externalities

In the case of planting trees, the positive externalities include the provision of cleaner air, a pleasant environment, and increased property values. These benefits are not limited to the individual homeowner but are experienced by the entire community living in the area. The municipality would like to promote these benefits and internalize the positive externalities by providing a subsidy. #Step_3# - Drawing the diagram

In this step, we will draw a diagram similar to Figure 16-4, showing the marginal social benefit (MSB), marginal social cost (MSC), and the optimal Pigouvian subsidy for planting trees. On the X-axis, we represent the quantity of trees planted, and on the Y-axis, we represent the cost and benefit associated with tree planting. There are two main curves – MSB and MSC. MSB is upward sloping, which indicates that the more trees planted, the higher the benefit to society. MSC curve represents the cost involved in planting more trees and is also upward sloping. When there is no subsidy, the intersection point of these two curves determines the private market equilibrium (Qp). To internalize the positive externalities, a subsidy should be introduced which lowers the MSC curve. The optimal Pigouvian subsidy should be equal to the difference between MSB and MSC at the socially optimal quantity of trees (Qs). This can be determined by the intersection point of the new MSC curve with the MSB curve. #Step_4# - Explaining the diagram

The diagram we just drew shows the optimal Pigouvian subsidy provided by the municipality for planting trees. This subsidy encourages homeowners to plant more trees, shifting the equilibrium from the private market quantity (Qp) to the socially optimal quantity (Qs). This leads to an increase in the overall quantity of trees planted near the street, providing greater benefits to the entire community, including cleaner air, improved aesthetics, and potentially higher property values.