When a party takes decisions of production, investment or consumption of any good, it indirectly affects a third party who was not previously taken into account. The party who undergoes these transactions can be an individual, a household or a firm. These transactions have loopholes which can either be beneficial or harmful to the unrelated third party. Economists define the indirect effects as Externalities (Helbling). A positive externality is one where consumption or production of a good causes positive effects, while, a negative externality is one which is unfavorable and undesirable to the third party.
Driving a car on the road is a negative externality that I cause for others. This is because social costs associated with driving are more than the social benefits, which makes my driving socially inefficient. Driving is an action and behavior which damages the welfare of other people on the road. However those people, being the third party, have no control over my actions. This eventually begets to the market failure.
The cost of driving is borne by others as congestion, emission of carbon and traffic accidents. Every time I drive a car, millions of others suffer because of me. Carbon emissions pose a threat to the environment. Traffic congestion is what affects people the most. Road is a public good. The more the people use a road, the less will be the speed of the car. There are two external costs that are associated with commuting, i.e. social and private cost. The private cost will be lower than the social cost (Helbling). Moreover, number of accidents and fuel costs increase rapidly.
When negative externalities are huge, they become a menace. Therefore, the government has to intervene. The government can place a toll on the congested roads which would force people to pay a price for crowding the roads. The government can also enforce car tax, fuel tax, and parking tax. It would be worth to get involved as it would lower the socially optimum output to reach the market equilibrium.
Work Cited
Helbling, Thomas. "Finance & Development." Externalities: Prices Do Not Capture All Costs. Web. 27 Apr. 2015.
