Case On Social Cost Essay, Research Paper

Assuming no pollution, explain why a road is only an example of market failure

when it is congested. When a road is not congested and the traffic can move

freely along it, the private cost is equal to the social cost. The road is non-rivalrous

because everybody who wants to use it can. For every user that uses the road

above the amount that makes the road rivalrous, they have to pay the externality

of the congestion. As more people join, the externality increases. The

externality is also known as the external cost. Because the road becomes

congested, the journey time of the users is lengthened. The additional road

users should pay the cost of the other users time. On a congested road, a car

for example uses more fuel than it would on a non-congested road, this cost

should also be considered. Measuring the social cost is very difficult. Listed

above are just two factors that determine the extent of the social cost. The

social cost can be different at different times of the day, e.g. at 8:30am in

the morning, the roads are very busy because of people travelling to work. The

same goes for 5pm when people finish work. In the early hours of the morning it

is unlikely that you will any cars at all. There is market failure when the

Marginal Social Cost (MSC) is greater than the Marginal Private Cost (MPB). This

only happens when the road is congested (we can see this from the diagram). This

is why a road is an example of market failure only when it is congested. The

additional motorists that wish to use a congested road should pay the external

cost, we can see this also on the graph.