In 2022, private car journeys in municipal areas reached historically high levels, contributing significantly to urban gridlock and air pollution. Economists argue that individual commuters rarely account for the external benefits of choosing public transit over driving. When individuals choose to travel by rail or electric bus, they reduce local particulate emissions and traffic congestion, yet these positive spillover effects are largely ignored by private decision-makers.
Consequently, public transit services are underconsumed, leading to allocative inefficiency. Modern urban planners suggest that heavily subsidising transit fares or providing free municipal bus services will go some way to correcting this market failure. However, free-market critics argue that fares should be determined purely by market forces, stating that subsidies distort the price mechanism and lead to government failure. They suggest that congestion charging is a more efficient way to internalise the costs of driving.
Define the term 'external benefits' (Extract B, line 3).
378 exam-style questions on AQA A Level Economics 1.8 The market mechanism, market failure and government intervention in markets, covering 1.8.1 How markets and prices allocate resources, 1.8.2 The meaning of market failure, 1.8.3 Public goods, private goods and quasi-public goods, 1.8.4 Positive and negative externalities in consumption and production, 1.8.5 Merit and demerit goods, 1.8.6 Market imperfections, 1.8.7 Competition policy (A-level only), 1.8.8 Public ownership, privatisation, regulation and deregulation of markets (A-level only), 1.8.9 Government intervention in markets, and 1.8.10 Government failure. Each one has a worked solution and a mark scheme showing where the marks go.