Question

Rush hour traffic leads to congested road systems and longer commute times for
everyone. Briefly (4-5 sentences) explain how a city government could address this
negative externality using (i) price corrections or (ii) quotas.

Answer 1

i) Using price corrections: The government can increase the cost of travelling to include the price of the negative externality. The government should impose a tax on travelling equivalent to the amount of negative externality which will increase the cost of travelling and reduce unnecessary travel and hence, the traffic may be reduced. Therefore, the problem of externality can be addressed.

ii) Using Quotas: The government should impose restrictive quotas on travelling. Like allowing people to travel only once in a given time frame, or fixing a maximum number of people who can travel in the rush hours. This way the traffic can be reduced and the negative externality may be dealt with.