Running Head: EXTERNALITIES
Externalities
Externalities
Externalities are present in almost each and every economic activity; they are the effects that are experienced by the third parties due to production or consumption of goods and services with regard to compensation. It impacts on the market negatively if no consideration is placed on the pricing measures as well as the social costs and benefits of production and consumption. Such market failure gives the government an opportunity to intervene to improve the situation.
In the case of traffic congestion, the government may as well create a positive externalities involvement through building of more public roads and adding the number of lanes on the available roads. This will prove beneficial to the citizens as they will get more space to ride on. This may however prove to be expensive in the urban areas considering the scarcity of land. Moreover, the use of more concrete to minimize the congestion will add onto the existing problem of vehicle emission considering the widen roads more people will add more vehicles to the roads.
There can similarly be a negative externalities used with the government charging fees or toll for those who use the roads; it will raise this toll leading to the reduction of vehicles on the roads. This step does not take into consideration the population; does not acquire the benefit of the society and the costs that is incurred by them. As applied by the Nobel Laureate economist William Vickrey in his “congestion pricing” it is applied in some countries like Sweden. It however proves to be a nightmare to traffic engineers mostly in the peak hours of mornings and evenings. This pricing scheme has however been contracted to another company; IBM Corporation that will be involved in the installation of transponders on the windshields for the charging purpose. IBM has gone ahead to incorporate laser detectors to read license tags and cameras to tract vehicles in the Sweden city, Stockholm.
Bibliography
McGraw-Hill (2011). Government Regulation of Business. Chapter 16. Retrieved on 2nd August 2011.
Advanced Topics in Managerial Economics (n.d.). Taming Negative Externality with Congestion Pricing. Illustration 16.1. Retrieved on 2nd August 2011.
