Question

Read the following excerpt and answer question 1.
TRAFFIC on Sydney’s clogged roads and motorways is now so congested it is costing the majority of businesses in Western Sydney up to $5000 a year. The startling figures were revealed as part of the NRMA Motoring & Services BusinessWise survey of almost 730 businesses that run vehicle fleets. Frustrated local businesses who took part in the survey said travel times for each of their work vehicles had jumped, on average, by 59 minutes every day due to roads clogged by commuters forced into their cars because of poor public transport options. In the past year about six out of 10 Western Sydney firms said their fuel bills had risen as a result of congestion ……. Author Jim O’Rourke Source: The Australian web site April 08, 2014 12:00AM
1. Identify the negative externality discussed in the article? Explain, using a graph, how the negative externality leads to an inefficient price and level of output. Provide two solutions that you would recommend to the government to address the externality? Word count 350.

Answer 1

An externality is an economic effect on the third party which is not related to the transaction done in the buyer and seller in this case. An externality could be positive or negative depending on the situation. Technological innovation such as the internet which benefitted too many companies who were not involved in developing it is a case positive externality. Pollution is the case of a negative externality.
In the above paragraph, it is mentioned that people in Sydney are using their private cars for commuting but consumption of such good is causing a traffic-clogging on the streets. It means more waste of time and burning fossil fuels which will add pollution to the environment.
A negative externality creates a deadweight loss because of inefficiency and that results in higher cost, lesser consumer surplus and overall inefficient allocation of resources.

The government can move in to neutralize this negativity which is causing the heavy cost to society.
The government needs to strengthen the public transportation system where people can use tram or buses for short distance while train for longer routes. The fare should be subsidized so that more and more people will be encouraged to use that.
The other thing the government can do is to collect congestion charge from the car owners who are commuting through peak traffic hours. This will incentivize people to use public transport or at least carpooling option. The government can use that collected money for funding mass public transportation as well as environmental purposes.