Question

Consider two ways of commuting in a crowded city: taking public transportation, such as subway and buses, or driving your own car.
A person who chooses to take public transportation in a crowded city imposes a _________ externality on drivers. A policy implication of this result is a _________ those who take public transportation.
Persons who choose to drive their own cars to get around in a crowded city impose a _______ externality on other drivers. A policy implication of this result is a ________ those who drive their own cars.

Answer 1

Answer:

Positive; Subsidy for

Negative; Tax on

Explanation:

An externality is the economic term that describes a cost or benefit incurred or received by a third party, over which said party has no control over its development.

When externalities result in a benefit for a certain group they are said to be positive and when it is detrimental it is said to be negative.

Taking public transportation in a crowded city is benefitial to drivers making this a positive externality. In order to encourage people to take public transportation, a subsidy for those who take transportation may be adopted.

On the other hand, people who choose to drive their own car impose a negative externality and may encourage a tax on those who drive their own car.