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

Congestion is indeed a negative externality and this is because of the fact that due to Excess supply of vehicles, even the people who actually require it will lose a lot of time and have to pay for it it as a result of which the third party will be paying the cost. when there is a cost incurred to third party, is usually considered as negative externality. In order to correct the negative externality it is very important for the government to intervene so that it imposes a toll on the vehicles as a result of which the supply of vehicles on the road decreases so that the marginal benefit will be equal to marginal social cost and with this the externality is corrected.

MSGC M POC toulgout in the Rio - Demand g t 2