Question

A problem in many metropolitan areas is traffic congestion.

a. In what way is this an externality? (Don't have to answer this one, I know it)

b. How might you determine the externality by me driving my car? (Don't have to answer this one, I know it)

c. Suppose that for every car that enters the road during rush hour:

All of the other 10,000 cars on the highway have their trips slowed by 1/100 a second; the cost of an hour on the highway is $15 ($12 wages + $3 gasoline)

What is the externality imposed by me driving my car?

d. Consider two plans for correcting this externality:

i. a gasoline tax in the city

ii. a toll for the congested highways

Which scheme would you recommend and why?

Answer 1

A) This is an externality because it imposes a external harm or damage or cost to the parties not involved in the transaction.

That is, the damage done to commuters in the form of slow traffic, more travel time, pollution etc. is nothing but negative externality.

B) The pollution generated, increase in travel time of others because of more cars on the road are the externalities imposed

C) Cost of one hour = $15

So, cost of 60*60 = 3600 seconds = $15

So, cost of 1 seconds = 15/3600 = $0.004166

So, cost of 1/100 second = 0.004166/100 = $0.00004167

This is the negative externality by one car

D) A toll for congested highways would be a preferable policy option as it will affect consumer behavior and they will start avoiding congested highways and thus reduce the problem of congestion on such roads