Robert – what do you call a bad example of an externality then, and how does it differ quantitatively from road congestion?

But isn’t that the point. It is close to zero if the costs and benefits are properly allocated out.

That said, I remain convinced that road congestion is one of the best examples of negative externalities out there. And John, I did actually identify the size and direction of the externality – it’s negative, because we not only pay the average cost but we add to everyone else’s cost too, so the total social cost of our trip is higher than what we pay. Short of writing a model, I don’t know what else I can do on that score.

By the way, no sensible pub owner would want to levy an congestion charge because a crowded bar generates huge positive externalities – people like going to places that other people go to. Doing so would indeed be bad economics.

Unfortunately, externality argument are often abused. In first year economics people are taught the simple story of “perfect markets are good, but externality makes them bad, so if you see an externality, try to fix it”. The problem is that nearly all actions have multiple externalities, positive and negative, and so a simple-minded externality approach allows you to justify anything.

When externalities are properly understood, it becomes clear that it is difficult to determine even the direction of the externality, let alone the size.

There are negative externalities from education. There are positive externalities from noise pollution. There are both positive and negative externalities from walking down the street. The externality argument is perhaps the most abused tool in the economic tool kit… and I think the congestion issue is another example.

But, as I said, that doesn’t mean road pricing is necessarily wrong. A pub doesn’t introduce a cover charge because of a “congestion externality”… and likewise a road company could legitimately introduce a road charge without resorting to bad economics.

A tax to ration the use of public resources does not compensate anyone for the externality allegedly caused by other users.

But your point about the existence of gross externalities misses the point. It is the net externality that matters.

You simply assert that a road tax improves efficiency, but that claim rests on the idea that the road tax will correctly adjust for an imbalance in net externalities. You have not shown the direction or size of that net externality, you have simply shown that a single externality exists. This is the problem with simplistic welfare economics, as I described above. You need to factor in all externalities, running in all directions.

Your second last paragraph makes my point nicely. You note that some people will see the existence of congestion as a disincentive to join the road. Yes! That’s exactly what I’m saying. The congestion itself is the “tax” that you want. Though why you end that sentence with an assumption of social loss isn’t clear.

I agree that welfare policy is best done elsewhere.

I agree that an imperfect market doesn’t necessarily justify intervention.

(And even then, as Mark says, it’s not clear that “externality” is the right term, because people agree to enter the road knowing the possibility of congestion. This is like entering a bar and finding out your favourite chair is taken… sucks for you, but hardly an externality. The word “non-financial cost” would be more appropriate.)

When I said “you don’t care about the costs you impose on others”, that’s just another way of saying that the person who imposes the cost does not pay explicitly for it. A road tax ensures that the only trips that get taken are ones that are worth more (to the driver) than the marginal cost of them to society.

As for poor people being dependent on the roads, why provide welfare indirectly by not requiring them to face the true costs of their road use?

It doesn’t matter if someone chooses to join the road or not – if the congestion puts them off making a trip they would otherwise make, then society has lost out. It doesn’t matter if

Finally, the presence of an externality doesn’t mean the government has to act, John. The whole point of libertarian ideas is not to claim (as you are) that there is no (significant) market failure in road use, but that government intervention is unlikely to improve social welfare.

I think it is silly to think in terms of externalities when people make a decision to join a crowded road. If both people in an elevator fart, neither has a right to complain. Further, taxing this particular “externality” does nothing to compensate people for the cost they allegedly have imposed on them and which they impose on others. The effect of a congestion tax is to reduce congestion for the benefit of those prepared and able to pay the tax. You might think this a good thing, but if so you probably aren’t relatively poor and dependent on your car.

Mind you, I have no objection to user pays, but we have already established that the fuel tax covers road costs pretty well.

The only way in which a road tax could be said to compensate for an externality is if the money was used to build sufficient roads for the traffic levels desired by road users. And you can see where that logic leads you on the subject of road taxation.

You could reword this as “by joining the traffic you create an externality and also face an externality”. This is where the current poor state of welfare economics gets in the way. Currently, people think “if externality exists, must have tax or subsidy”.

But nearly all human action creates externalities, often both negative and positive, so this criteria gets us nowhere (or, more realistically, gets us everywhere, allowing us to justify anything). What matters is if the “net externality” from an action is large and clearly in one direction.

The net externality from congestion is unlikely to be zero because different people have a different value on time… but it is likely to be near zero and it’s almost impossible to work out what it is.

The idea that everyone imposes costs higher on everyone else than what they incur from everyone else and this increases as there are more road users is highly questionable. Take for example another common pool problem: common pastures. It doesn’t make sense with a village of equal livestock ownership or concentrated ownership. I don’t think the maths here doesn’t seem to support the Henry/Clarke/Cotgrove idea. Particularly when you can only drive one car at a time – as opposed to grazing more livestock than your neighbour.

Even if you get the maths right, you’re only halfway there to showing an externality. People make these decisions in a fully informed manner and expect to incur externalities voluntarily.

Where ever is the assumption that in the basic examples of say, land pollution or pollution of groundwater near a lake that third parties expect to incur externalities?

“The externality is that you don’t care how much worse you make if for everyone else.”

No that’s never right. The externality is the cost you impose on others that has not been paid for explicitly.

However if you think roads are public goods, your solution of more taxes implies that you think more roads should be built or that people should change their schedules (going back to the common pasture, commoners could either go elsewhere or have better management practices). I think it is easier for Governments to build more roads than to dictate a change in working hours to get an optimum level of congestion.

That said, some roads are uncongested and others are not. I think this points to a lack of planning or a lack of profit motive, or both.

Furthermore, the current fuel taxes are in the lower range, but definitely within the range of congestion & pollution charges Harry was suggesting.

Frankly I think this is a case of privatisation and relaxing development rules. The M7 works a lot more smoothly than the roads it replaced/superseded.