Overview
As the authors explain in Chapter 2, 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. London and other cities reduce congestion by imposing road tolls on drivers who enter the central city districts. These taxes can make the market outcome more efficient by charging drivers for the external costs associated with driving in a congested area.
During the pandemic, similar external effects arose in restaurants, theaters, and other public venues -- your presence increased the health risks to others, and their presence presented a risk to you. After public venues were reopened, many states and cities reduced these risks by imposing regulations like minimum distance standards (e.g., maintain at least 6 feet between patrons) or limits on the number of patrons (e.g., 50% of normal restaurant capacity). In future, suppose we try to reduce the social costs of public interaction by using the toll road approach instead of regulations -- cities could add a $10 per person tax to each dine-in restaurant meal or theater ticket. Would you prefer to live with capacity regulations or pay the tax? Which approach to resolving the negative externality problem is more fair?
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