I grew up in a valley that is hidden from most of the city’s economic activity by a large mountain. You have two choices to get to work. Go round the mountain or go over the mountain. In the morning and evening, people wait on the roadside to hitch a lift over the mountain. It is puzzling situation. The hitchhikers clearly have jobs, so they would be willing to pay for a bus. One afternoon, I gave a lift to one of hitchhikers and questioned her on this puzzle.
She explained that minibus taxis are not allowed to drive over the mountain. They drive too fast on the winding mountain pass. This is not surprising since their profit is determined by the number of people they transport from A to B in a single day. Driving dangerously is the profit maximizing strategy. This is a classic example of an externality. The taxi drivers do not consider the effect of their driving on the safety of other commuters on the mountain pass. Economics says that externalities call for government intervention.
Regulation is not a good option in this case. The profit incentive is too strong for the taxi drivers to stay within the speed limit. Enforcing the speed limit would be too costly. The government should supply the market themselves and pay their bus drivers a fixed fee with bonuses for safe driving.
The problem for the hitchhikers is that they have not lobbied the government strongly enough. This is an example of a public good. Each hitchhiker would like to benefit from a government-provided bus, but would rather have someone else do the knocking at government’s door.
Externalities and public goods are entrenched in the economics curriculum. It is encouraging that they are present in reality – even in my own back yard.