economics of policy issues

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Externality of an economic transaction is an impact on a party that is not directly involved in the transaction. In such a case, prices do not reflect the full costs or benefits in production or consumption of a product or service. Externalities are often negative effects created by a party who has taken an action over those are not involved in this action.


As a result these traffic congestions occur more frequently as the trouble makers (those who do not follow the traffic rules) do not take into account the problems that others stuck in this jam would face. If they are aware of the fact that other people would suffer because of the jam that has been created due to their negligence, they would avoid doing it. Since then they will realize that gains such as (reaching the office or school) would be less as compared to the harmful effects of the jams such as accidents, tension, chaos and other problems that traffic jam creates.
Economists usually explain this theory using a diagram. This diagram says that if people are aware that they cause externalities with their action, they will do less of these actions which create externalities.
Suppose, that a person want to break a traffic rules for one reason or another. Before making the decision he'll only look at his external costs (such as fines, traffic tickets etc.) and his private benefits (such as reaching destination early etc). In such a case his private cost curve will also be his supply curve and his private benefits curve will be his demand curve. The equilibrium in this case will occur at point where demand is equal to supply or in other words where private costs are equal to private benefits. ...
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