The diagram shows negative externality creating external costs causing the Marginal Social Cost curve to lie above the Marginal Private cost curve Diagram 1 shows there has been overproduction of traffic congestion and that is leading to welfare loss to society as MSC is greater than MPC. Our optimum output is at MSC=MPB due to welfare loss our current output is QS.
The problems caused by traffic congestion can be resolved by government intervention through use of various policies. The roles of government is to maximise the welfare of its citizens, if there is a welfare loss because of Market Failure then government intervention is appropriate .Firstly the government can impose fuel taxes such as road pricing to “while road pricing has long been used to finance new bridges and tunnel” stated in the article, to reduce traffic congestion. A tax on fuel would increase fuel prices, encourage people to use public transport and discourage the consumption of private transport. This can be shown in the diagram below.
The diagram shows that when a tax is placed on a good it shifts the supply curve to the left. The supply and demand for fuel is inelastic, a shit causes price to raise, a large amount from P1 to P2. However quantity demanded decreases by a small amount only so this policy will not work in the long term, as price elasticity of demand for fuel is inelastic. In addition an increase in fuel taxes, fuel such as petrol and diesel has very few substitutes. Therefore increasing fuel taxes will have little impact on congestion. S
Imposing taxation will shift the MPC curve to the left from MPC to MPC1 reducing the output from QP to QP2. This reduces the welfare loss compared in diagram 1 and is making people pay for the externality. However another disadvantage of imposing tax on fuel would result in inflation.