My hometown is Wilsonville, Oregon – a standard suburban town south of Portland, Oregon. Wilsonville is situated along I-5, the interstate that runs down the west coast from Washington to California. Now, when I say my hometown is on I-5, I mean that the freeway runs directly down its middle. Over time this has created a major traffic problem; whenever there is traffic going southbound on the freeway, the center of town essentially comes to a standstill. Good luck trying to get from one side to the other during rush hour. Here, we have a classic negative consumption externality problem.
The issue is that I-5 consumption (drivers using the freeway during rush hour), exerts a negative externality on those in Wilsonville trying to move about town. This negative externality takes the form of increased travel times for drivers who have zero intention of using the freeway and are not compensated for the costs inflicted by others. So, during rush hour the private marginal benefit (PMB) of using I-5 is greater than the social marginal benefit (SMB). This means the equilibrium quantity of road consumption is greater than the allocatively efficient level. The solution? Putting tolls on I-5 – something that Oregon does not currently have on its freeways. This would lower each freeway driver's PMB of freeway consumption, ideally to equal the SMB. Much to my surprise, the Oregon Department of Transportation is actually in the process of considering tolls to remedy congestion problems such as this. Wilsonville may see a government solution to its negative externality problem in the near future.
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