Thursday, December 13, 2007

Congestion Again


The answer to part a of the congestion problem on the 2007 exam states:

"the trips cost society the rectangle A in private costs plus the triangles B
and C in externalities"

Can you please explain?


Technically, areas A, B, and C are all costs of the externality in the free market. The total cost of an externality is the per unit cost times the number of units transacted, which gives the area A+B+C.

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