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Business-stealing and product variety externalities

A hotel owner, having heard that new hotels plan to open in the area, says, "We have too many hotels in this town already. Statistics show that vacancy rates average 20 percent on any given night." Assuming his statistics are correct, evaluate his negative assessment of the situation in terms of business-stealing and product-variety externalities.

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An externality occurs when the benefits or costs of a situation do not accrue to the appropriate parties (ie those who have paid for them). It can be positive if benefits accrue, or negative if costs accrue.

Business-stealing is a negative externality. The costs of starting a new hotel are borne equally by all the hotel ...

Solution Summary

Business-stealing and product variety externalities as they apply to the lodging industry. Because of business stealing, hotels cannot in the long run obtain economic profits. But they benefit from product variety externalities.

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