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1. Consider two ways to protect your car from theft. The club (a steering wheel look) makes it difficult for a car thief to take your car. Lojack (a tracking system)makes it easier for the police to catch the car thief who has stolen it. Which of these types of protection conveys a negative externality on other car owners? Whichconveys a positive externality? Do you think there are any policy implications of your analysis?
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Answer #1

Consider two ways to protect your car from theft. The Club is a conspicuous steering wheel lock that makes it difficult for a thief to take a car. Lojack is a secret tracking system that makes it easier for police to catch a thief who steals a car on which it is installed.

If a car thief encounters a car with the Club and a car without it, the car with the Club imposes anegative   externality on the car without the Club. A policy implication of this result is atax on   those who use the Club.


Explanation:

The Club conveys a negative externality on other car owners because car thieves will not attempt to steal a car with the Club visibly in place, so they move on to another car. A policy implication is a tax on those who use the Club. See Section: Negative Externalities.


If a car thief encounters two cars without the Club, but the car thief fears a Lojack system might be installed in one of the cars, the car with the Lojack system imposes apositive   externality on the other car. A policy implication of this result is asubsidy for   those who use the Lojack technology.


Explanation:

The Lojack system conveys a positive externality because thieves do not know which cars have this technology. Therefore, thieves are less likely to steal any car for fear that this technology is in place. A policy implication is a subsidy for car owners who use the Lojack technology. See Section: Positive Externalities.

source: Official Answer
answered by: Ruby
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