Tolls on new roads correct negative externalities in traffic

Steps:

• Identify the problem: Traffic congestion is a negative externality where drivers impose uncompensated costs on others, leading to overuse of roads.
• Recognize market failure: Without intervention, the free market underprices road use, causing inefficiently high traffic levels.
• Analyze the intervention: Building a new road with a toll internalizes the externality by charging users for the congestion they create.
• Determine main purpose: The toll reduces congestion by discouraging unnecessary trips, aligning private costs with social costs.

Why A is correct:

• Market failure occurs when negative externalities like congestion lead to overconsumption; tolls address this by Pigouvian taxation, making users pay the full social cost.

Why the others are wrong:

• B: Tolls target road users to reduce car traffic, not public transport, which might be encouraged instead.
• C: The toll focuses on demand management for efficiency, not just increasing road supply.
• D: Revenue is secondary; the primary goal is congestion reduction, not profit.

Final answer: A