The aim of public policy is often to counteract externalities, but the problem is that externalities...

The aim of public policy is often to counteract externalities, but the problem is that externalities are often hard to quantify. What is congestion externality? What is the difference between the private and social costs of travel? How does the proposed congestion tax attempt to solve the problem of the congestion externality?

Expert Solution

Congestion is an important type of externality.When people drive on a congested road then they tend to contribute to the congestion.Not only these people suffer a longer drive time and get brustrated but also,they impose these cogestion costs to the other drivers driving on the road as well.

consider this problem on the basis of numbers where X number of people who are driving on these roads no only waste Y number of hours but also incurr cost in the form of willingness to pay to not get stuck and the cost of gasoline while also,contributing to the air pollution.If it takes an hour to clear these cars then,multiply the number of cars with the amount of toll tax which is the total reveue generated but the total economic cost to clear them would be quite high.

The relationship between private cost and social cost is given by the following equation-

Private costs + External Costs = Social Costs

Private costs are paid by producers and consumers and refers to the amount which a firm pays to purchase capital,labor,raw materials and other inputs to produce a good or service. As per consumer's point of view this cost for example may incurr when a person drives a car and would incurr cost on fuel,oil,maintenance,depreciation and the drive time.

External costs refers to the costs which the society pays because of the actions of firms such as if the firm try to save costs by not installing proper equipments to control water pollution in it's factory then, the cities would have to pay to clean this pollution and the other industries such as fishing would get harmed.The individuals contribute towards external cost by involving in congestion and contributing to the air pollution as per above example.

Social costs include both the private cost and external costs which arises becasue of production or consumption process.Social cost would be different from private costs,if a producer can avoid the cost of pollution or a consumer avoids paying for congestion and contributing towards pollution.As a result,social cost cost would be high from pollution,congestion and environmental degradation.

The congestion tax would solve this problem to certain extent in the following manner-

It would reduce the congestion as people would want to save the tax and so,this would result in time saving and less reduce pollution as there would be fewer cars on the road.

It would increase the quality of life as the roads would be clean and people would use cycles more which will make the city centres more attractive and also,increase the health of individuals.

It would also raise revenue for the government which can be spent on improving other infrasatructure and alternative and environmentally friendly modes of transport.

Rahul Sunny answered 2 years ago

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