Question

Consider the following event and identify which type of externality it creates:

“…. Congestion caused by driving car to work”

In your answer you need to also explain whether the private market will overproduce or underproduce, and how government can intervene to correct the problem. Explain with the aid of an appropriate diagram.

Answer 1

This is an example of negative externality because this over condition causes the essential workers not to move quickly e as a result of which the third party has to pay for the cost if there is a private equilibrium as a result of which in order to correct the negative externality the government must intervene in the form of toll so that only the necessary people will move from that road as a result of which congestion reduces. in this regard you can understand that with the intervention of the government the supply will reduce as a result of which the marginal social benefit is equal to marginal cost.

Social Marginal caer AP tou tan Private Marginal cost (PMC ar li D g Q,