Case On Social Cost

Case On Social Cost 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.

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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.