ECO 421LEC Lecture Notes - Lecture 3: Externality, Social Cost
Document Summary
Congestion on highways is an example of a negative externality. If a negative externality is not properly priced, there will be too much (more than optimal) engagement in the activity that creates the negative externality. Calculating: t: travel time, k: road capacity, v: volume of traffic (= trips, t = a *(v/k) is the time of each trip, rising with the volume of traffic, total time = v*t = a. One more trip= a*((v+1)^2/k) a*(v^2/k) marginal delay (setting k =1, a=1)= = 2v+1: since delays are measured in hours, we would multiply by v. o. t. (value of time) of the average traveler, use v. o. t. = w for brevity, marginal social cost of one more trip = = msc = w(2v+1) Public goods and other forms of agglomeration are examples of a positive externality. Business ideas, learning by observing others are other examples.
