Question

A policy maker argues that congestion on the roads can be solved by private ownership of the roads. He argues that if the roads were privately owned, then the externality of congestion would be fully internalized and solved by the market. Discuss this by first explaining the externality problem that leads to congestion, and then explain whether the private market would deliver the efficient level of roads.

Answer 1

Answer:

Externalities can be defined as those activities that incurs cost on another party.

Road congestion creates externalities such as increased time for travel, more pollution in a city, more likelihood of accidents, more stress for road users.

This externaliity is caused because road users think of the private benefits that they can get from using the road but they do not take the social cost into account. We have lots of drivers on the road and non of these drivers takes cognizance of the cost that other drivers get because of this.

If road are private, congestion is going to fall and there would be excludability. But this is a public good, turning it to a private good would cause issues. Private markets benefits out is positive externalities.