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Consider the use of tolled highways. When the number of cars using the highway exceeds a certain level, there will be traffic congestion such that...

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Consider the use of tolled highways. When the number of cars using the highway exceeds a
certain level, there will be traffic congestion such that drivers are creating negative
consumption externalities. Suppose a government official proposes to increase the toll to a
level that can eliminate congestion. Discuss how the negative consumption externalities arise. In particular, who create(s) the
externalities and who suffer from them? Draw a diagram to represent the above situation. In your diagram, indicate the
unregulated market quantity and socially efficient quantity. Is there over-congestion in the
unregulated market? What is the outcome under the proposal of the government official? Explain whether you
agree with this proposal. [Hintz (1) Externalities may not start from the very first unit. (2) Eliminating congestion
means to remove it totally.]

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