The Undercover Economist - Part IV - Crosstown Traffic

Market Failures





- Scarcity Power


- Missing Information


- Externality



Different kinds of prices: marginal and average



- Average price vs Marginal price (pay for extra trip)



"Externality Charge" e.g. traffic congestion (drivers incur no costs for making an extra trip), pricing should reflect the damage

- externality charge is not to discourage everyone from doing anything that might inconvenience anyone else; it is to get them to take into account the inconvenience they cause to others.



Example: Pollution from Driving

Externality cost (costs inflicted on others but not the driver)



Two Objections to Externality Charges

1. Unfair tax aimed at a disadvantaged group

- The rich will be able to do whatever it was that was objectionable (it is targeted at stopping voluntary activities)
- Raising more money from the rich (redistribute income)

2. Some simply feel the pollution should be illegal

Determining Externality Charges

it should adress all the externality costs, and externality costs along. Since it is very awkward to determine externality charges, the best way is to look at their "revealed preference"

- it does rely on the shaky information about how much it is really worth to us to reduce externalities such as noise, pollution and congestion; adding to that is we don't know how much it costs to reduce it. So we rely on scientific information

Battling Pollution
Example: EPA's auction for sulphur dioxide emission rights (few made high bid and exaggerates costs of reducting pollution); let EPA find out how much reducing pollution really costs