Externalities and Road Transport Economics - Essay Example

The existence of externalities such as congestion and pollution often negatively affect resource allocation in road transport by distorting the various pricing mechanisms thereby resulting in the less than optimal allocation of resources to the sector.

The resource allocation changes through externalities since the market fails to completely fund the external belongings caused by economic actions. Markets' prices tend to reflect a price based on the original personal utility while disregarding the payback on the third parties. Therefore, personal costs may deviate from social costs as the pricing means fall short to replicate the social-economic actions. When the demand for road uses rises above a given level, additional costs (externalities) such as congestion, pollution may result in increased costs such as increased fuel consumption, increased journey times, and other running costs as shown below.