The Role Of Externalities In Economics

Driving is an activity that is common. Some areas have heavier congestion than others. Externalities are associated with various areas in the economy including congested roads. The answer to this question will focus on externalities associated with additional individual's driving on a congested road. This question will also give some ideas on how tolls may help alleviate this externality, where tolls are not helpful, and how they may be set. Externalities in the field of economics are either positive or negative and usually happen to unrelated third parties. (Stiglitz & Rosengard, 2015). Most externalities in economics are negative because they produce an increased aggregate cost to the economy and society; having social cost more than …show more content…
These changes are either beneficial for all, some or make things worse for the majority. Pareto improvement occurs when a change benefits some individuals without making other individuals worse (Stiglitz, 2000). This answer will focus on policy changes and program proposals in four areas and explain if it is or it is not a Pareto improvement and how improvements to efficiency and equity may …show more content…
A policy or program may either be a Pareto improvement, or it is not (Chou & Talmain, 1996). Protecting the automobile industry from cheap foreign imports by imposing quotas on the number of imported cars is a Pareto improvement. This is because having high quality cars will benefit many and help to ensure the vehicle safety of individuals. Reducing cheap foreign imports would have a positive impact on reducing externalities involving vehicles and roads. Increasing Social Security benefits, financed by an increase in the payroll tax is a Pareto improvement because it is potentially making some individuals better by increasing their benefits who are currently paying into the Social Security Fund and not making others worse who have paid or who have not paid into it as they will still receive their portion of Social Security in one form or another with the basic benefits. Replacing the primary reliance at the local level on the property tax with state revenues obtained from an income tax is not a Pareto improvement because those who pay property tax at the local level will now have to rely on the state. This policy may work for larger cities where the state taxes could stretch further, but smaller cities will be at a disadvantage as their state taxes may not stretch as far. The last of the four areas