1. What is the externality associated with an individual driving on a congested

Question

1. What is the externality associated with an individual driving on a congested highway? how do tolls help alleviate this externality? how should tools be set? (Hindt: would you always want the toll to be the same all day?)

2. The steel industry pollutes the atmosphere as a consequence of its production process. Is it possible that it would be better for society that steel is produced by a monopolist instead of a set of perfectly competitive firms?

3. Farmers irrigate their crops by drilling wells into the aquifer. As farmers pump more and more water from the the aquifer, all must frill deeper to reach water: and the deeper the well, the more costly it is to pump the water

a) Identify the missing property rights in this instance

b) Is there an economic argument for limiting the amount of water farmers can pump from their wells?

Explanation / Answer

1. Traffic congestion

When a driver enter into a road he gain some mobility and bear some cost of driving. But as he enter into road the space to other driver becomes congested. This congestion cost is not born by this driver but bear other driver. This is an example of negative externality.

Toll road is not for all driver. It is for them who pay for it. It is the simple and strong argument behind toll. Actually negative externality in this case can be reduced as toll road is no more public goods, It slightly changes its nature . If toll reduces the road congestion then it implies that externality also is reduced.

Variable toll is very useful. It depends on the time of day whether it is peak hour or free hour, size of the vehicle etc. This method is very reasonable as it reflects that the rate of toll is determined by the degree of congestion a driver is making.

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