Assignment task: As the authors explain in chapter two, some markets can fail to achieve the efficient outcome if there are external effects present. For example, if you drive your car in a congested city, your presence on the road reduces the available space for other drivers. Consequently, your presence on the road has a negative impact on the other drivers, and their presence has a negative impact on you. Accordingly, drivers do not recognize the full cost of their driving activities, and they would drive less if they had to pay this full cost. For many years, Chicago and other cities charged tolls on major highways that pass through the urban area. More recently, London and other cities reduce congestion by imposing tolls on drivers who enter the central city districts on any road. These taxes can make the market outcome more efficient by charging drivers for the external costs associated with driving in a congested area.
COVID reduced congestion in most central business districts and on most public highways because many workers remained at home and did not commute to central business districts each day. Even now, office occupancy rates in most cities are well below the pre-pandemic levels. Should local governments reduce the tolls when roads are less congested? Would this encourage economic activity in central business districts by reducing the cost of transit?