Web Notes > Exernalities and Public Goods

Congestible Goods

Some goods, like highways and national parks, are nonrival when few people are using them but become rival when heavily used. In the middle of the night, one person's use of a highway has essentially no effect on another person's ability to use it. During rush hour, however, each additional driver slows everyone else down.

Efficiency requires that we charge little or nothing for the use of congestible goods when they are uncongested. Otherwise, some people would choose not to use the good in order to avoid having to pay. That's inefficient because they are giving up the benefits they would receive from using the good and (as long as it is uncongested) the marginal cost of letting them use it is zero.

As a concrete example, think of a toll road at night. If the toll is $1, someone whose marginal benefit from using the road is 50 cents will not use it. That would be inefficient since the marginal social cost of them using it is zero. Once the road is there, and as long as it is not congested, the additional trip costs society nothing. If the toll causes the driver not to use the road, society loses 50 cents.

Once the good becomes congested, however, each additional user imposes external costs on all the other users. Since each additional user does not pay the full marginal cost of his or her decision, the resource becomes overused. The usual economic prescription in such a situation would be to charge users a fee equal to the externality cost they impose. For efficiency, however, we would have to be careful to charge the fee only when the resource is actually congested.

Finding the optimal size of the fee is a little tricky because the good switches between being rival and nonrival. On one hand you might be tempted to treat it like a nonrival good. In that case you would add up the marginal benefits received by each of the users to find the total marginal social benefit and then compare that with the marginal costs of congestion. On the other hand you might want to treat it like a rival good. Then you would add up the quantities demanded by each of the users and compare that with the congestion costs. Which is correct? The key is that the fee is only needed when the resource is congested. As a result, you'd want to treat it as a rival good because that's the only time you'd need the fee.
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Peter J Wilcoxen, The Maxwell School, Syracuse University
Revised 11/29/2003