Question

Suppose a freeway connects a busy port to a railroad yard (like the I-710 linking the ports of Long Beach). Trucks use the freeway to carry freight from the port to the railroad yard, where it is loaded onto trains for shipping to cities around the country. Suppose that no other traffic aside from these trucks uses the freeway, and that the freeway is congested. If all the trucks using the freeway are owned by a single trucking company (Ace Hauling), should the government levy a congestion toll on the freeway?

a) No, since all external damage generated by trucks are internalized by the single trucking company.

b) Yes, since trucks generate negative externalities.

c) Yes, since trucks internalize part of its externalities.

d) No, since there are no externalities in this case..

PART B)

Now, if two trucking companies (Ace Hauling and Best Hauling) share the freeway, should a congestion toll be levied?

a)Yes, since not all externalities are internalized in this case.

b)Yes, since there is no internalization of externalities.

c)No, since there are no externalities.

d)No, since all external damaged are internalized by each trucking company.

Answer 1

A. The correct option is A. Since there is just one truck company, it would take into account the problems(negative externality) into account while decision marking and thus, the costs will be internalized.

Thus, congestion toll is not required with a single company. The costs of externality are borne by the creator of the externality and thus, internalization of costs follow.

B. When there are two firms, the freeway is shared by th

Each would contribute towards congestion of the freeway .

But how much cost is borne by which company cannot be easily measured.

Thus, congestion toll is required because not all externalities are internalized.

The correct option is A.