Essay, Research Paper: Case On Social Cost

Economics

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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.

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