Introduction to Economic Analysis Essay Custom Essay

oad Pricing An externality describes a ‘spill over effect’ whereby one party makes decision and the costs of the decision are borne by a third party or community (Litman 2001.p.39). Thus positive externalities will benefit the third party or community while the negative externalities will cost the community. Traffic congestion is a classic example of the problem of externalities. In making decision regarding whether to join the busy traffic flow, the road users in most cases will only consider the private costs against the expected gains from a trip. What these road users fail to consider is the additional congestion and related delay that would result from their presence on the already busy channel. Such a decision to join the busy traffic flow will significantly have a spill over effect to the general community including; business operations, the traffic police, emergency services, and hospitals among others (Frank et al 2008.p. 40).

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