<p>In order to answer this question we first have to properly and rigorously define externality. Externalities are often vaguely defined as any effects on third parties but the correct definition of externality is more nuanced.</p>
<p>Mas-Colell Whinston Green (1995) Microeconomic theory states:</p>
<blockquote>
<p>&quot;Definition &quot;11.B.1 An externality is present whenever the well-being of a consumer or the production possibilities of a firm are directly affected by the actions of another agent in the economy.&quot; .... &quot;When we say 'directly,' we mean to exclude any effects that are mediated by prices.</p>
</blockquote>
<p>Mas-Colell Whinston Green (1995) is the most widely used graduate microeconomic text in the world, hence I would consider it authoritative source for a definition of externality. Moreover, most (good) textbooks exclude effects mediated by prices as well (see Mankiw and Taylor (2014) Mankiw (2018) Principles of economics or Cowen &amp; Tabarok Modern Principles of Economics).</p>
<p>Furthermore, your problem is missformulated. Removing congestion from public transport would not be positive externality but reduction in negative externality of consuming public transport (assuming there is any). For example, I do not know of any paper or book that would consider firm that chooses to pollute less (where pollution is negative externality) being positive externality. Reduction in negative externality is reduction in negative externality, not introduction of positive  one.</p>
<p>Consequently, in your case the question can be reformulated as:</p>
<p><em>Is congesting public transport by using it creating negative externality?</em></p>
<p>Answer is no if we assume that otherwise the market is well functioning and prices are determined by demand and supply. The reason for that is that the negative effect of you congesting public transport by sitting there is already priced in your public transport ticket. So here the external negative effect is already fully internalized in the price of the ticket (assuming no further market failures).</p>
<hr />
<p><strong>Edit:</strong></p>
<p>As pointed out in the comments this answer assumes that public transport actually prices its tickets using market prices. I interpreted the question as a hypothetical, but of course in real life it is empirical question if public transport actually uses market prices or not.</p>
<p>Of course, this is not always the case. In some countries public transport is not private, in some it is public-private partnership etc. Also, there is often difference between travelling locally (within city) and more broadly.</p>
<p>A lot of trains in the Europe actually do price their ticket based on the market demand. For example, you can see on the website  <a href="https://www.omio.com/search-frontend/results/EB00C987155134D3AA41F78712E609380/bus?locale=en" rel="nofollow noreferrer">Omio</a> (price comparison site), that the bus route between Amsterdam and Frankfurt is priced differently on different days (presumably reflecting among other things congestion). You can also see the same for trains <a href="https://www.omio.com/search-frontend/results/EB00C987155134D3AA41F78712E609380/train?locale=en" rel="nofollow noreferrer">here</a>. Hence for these buses and trains any 3rd party effect would be already priced in and there would not be any externality.</p>
<p>However, of course, empirically there are many cities where public transport prices are fixed, or determined not by market forces. In such cases price would clearly not price in the 3rd party effects save for special case where the prices is fixed at what would be market level.</p>
<hr />
<p>PS: Even if you would not like my reformulation, the above shows that congesting public transport does not create externalities, because whatever the congestion is, it is priced in the the ticket, so by extension claiming you not using it creates positive externality would be a contradiction, given that we already showed in case of public transport the external effects are priced in the ticket.</p>

CC BY-SA 4.0
2021-11-16T01:08:43.253Z
@Giskard what do you mean? 1. I tried to provide something I thought is better answer.  2. I did not downvoted your answer (if that is why you are asking), I think your answer is also ok but bit convoluted I think my answer is clearer and it addresses the problem in more direct way through definition of externality directly
1muflon1
CC BY-SA 4.0
2021-11-16T08:00:52.250Z
I deleted my comment within 30 seconds of posting it, because I realized this would come down to a matter of taste/opinion. I find my shorter answer less convoluted (: I find "mediated by prices" to be kind of vague, it does not explain the underlying mechanism. I also think [Adam Bailey's comment](https://economics.stackexchange.com/questions/48386/positive-externalities-of-cars-free-seats-on-public-transport/48387#comment78000_48386) is the best answer of them all.
Giskard
CC BY-SA 4.0
2021-11-16T08:20:09.950Z
@Giskard I guess you are right about the taste part but what do you mean does not explain the mechanism? The first thing you learn about externalities is that they are bad precisely because they are not priced in the prices of goods and services, causing market allocation not to be socially optimal
1muflon1
CC BY-SA 4.0
2021-11-16T09:48:14.827Z
I understand that the equilibrium allocation is not optimal, I write as much in my answer. Are you saying that there are no externalities when prices don't exists? If not, then what exactly do you mean with "mediated by prices"?
Giskard
CC BY-SA 4.0
2021-11-16T09:50:37.997Z
P.s. I dislike signalling my non-negative votes, but to avoid seeming malicous I will also write that the downvote on your answer is not by me - I comment on my non-homework downvotes. I guess we deserve the downvote for not writing about the lack of clear definitions (:
Giskard
CC BY-SA 4.0
2021-11-16T11:35:39.727Z
@Giskard no rather I say the opposite, I say 3rd party effects that are priced in are not externalities.
1muflon1
CC BY-SA 4.0
2021-11-16T13:44:02.150Z
"the negative effect of you congesting public transport ... is already priced in your transport ticket".  Doesn't that depend on how tickets are priced?  Would it be so if the ticket price was always the same, whether the bus/train was crowded or nearly empty?
Adam Bailey
CC BY-SA 4.0
2021-11-16T14:40:19.667Z
@AdamBailey well I assumed that there are no further market failures but you are right if there are some price controls that fix the prices the “incorrect” prices would not internalize the externality
1muflon1
CC BY-SA 4.0
2021-11-16T19:49:44.197Z
I agree that there exists *some* price that leads to the efficient number of bus trips. (This is the 'Pigou price' which factors in the harm you do to others when you take the bus.) But like @AdamBailey I don't see evidence that actual public transport operators charge this 'Pigou price'.
afreelunch
CC BY-SA 4.0
2021-11-16T19:52:31.443Z
@afreelunch well that depends on what country and place we are talking about. For example, in EU many interstate railways (railways are traditionally considered public transport) charge different price of train ticket depending on day and so on (I know this well because I use rails often, living in the Netherlands but not originally being born here). The same holds for long trip busses. In case of city public transport I agree they typically just have some set price set by regulator, most city transports are not even private but I interpret the OP as asking a hypothetical question
1muflon1
CC BY-SA 4.0
2021-11-16T20:04:28.473Z
@afreelunch I also further edited my answer to address this issue by the way
1muflon1
CC BY-SA 4.0
2021-11-16T20:11:34.710Z
Yes I agree with these points. One further point I would make: you say that there's no negative externality if the harm I do to others when I take the bus is priced in (using Pigou pricing). In a sense, that's true. But it's only true in the sense that there's no negative externality from carbon emissions if individuals are subject to an optimally chosen carbon tax. In both cases, it may be more natural to say that there is an externality, but it can be corrected by changing the price.
afreelunch
CC BY-SA 4.0
2021-11-16T20:14:17.693Z
@afreelunch actually, that would not be correct to say according to the definition by MWG. Since by MWG definition, only 3rd party effects not priced are considered externality. With the carbon tax, well there the price does not capture the external effect, but price + tax does
1muflon1
CC BY-SA 4.0
2021-11-16T20:16:39.997Z
In my view, the definition doesn't matter. What matters is understanding that the *logic* of externalities exactly applies here. (I guess I should expand this comment into an answer...)
afreelunch
CC BY-SA 4.0
2021-11-16T20:16:52.657Z
@afreelunch I mean you can of course disagree with the MWG definition, but actually few years ago I was looking into this because I have argument about this with other person and I was not able to find a single textbook with an example where effect that is priced in would be considered externality and I look at everything from Mankiws principles to Varian
1muflon1
CC BY-SA 4.0
2021-11-16T20:18:01.697Z
@afreelunch well but definition matters. For example, if I define A=2 statement A is a prime is logical statement. If I define A = 8 stating A is prime is not valid or logical
1muflon1
CC BY-SA 4.0
2021-11-16T20:22:08.233Z
I've just typed up an answer, hopefully it will clarify what I mean when I say that the standard logic of externalities applies (regardless of whether you want to call this an externality, and regardless of what various textbook authors say in their books).
afreelunch
CC BY-SA 4.0
2021-11-17T11:51:38.107Z
@1muflon1 Incidentally, what do you make of the literature on congestion externalities? Is everyone there using the term incorrectly?
afreelunch
CC BY-SA 4.0
2021-11-17T12:15:42.073Z
@afreelunch no they are using the word externalities there correctly. But congestion by itself =/= externality. For example on a public road which is provided free of charge through non-market mechanism, there are no prices to mediate the 3rd party effects so sure there will be negative externality of congestion. But now suppose we have private road and terrain is such that it is feasible to have toll booth at both sides of the road. Next suppose the road entrance is priced by supply and demand. Is there still an externality? Nope. Existence of externality is conditioned on market conditions
1muflon1
CC BY-SA 4.0
2021-11-17T12:18:35.527Z
@afreelunch incidentally if you re-read my answer you will note i corrected my mistake. I originally said bus seat congestion won’t be and externality and left it at that. Now my new edited answer says there won’t be externality if the tickets are priced by the supply and demand (and there are no further market failures for example in CO2 emission there is no property right for clean air so without Pigouvian tax supply and demand would miss the externality - but with buss there is no such issue). But if the bus is priced differently by fiat or provided free  there would be an externality
1muflon1
CC BY-SA 4.0
2021-11-17T12:22:42.443Z
@1muflon1 What I don't get is the following: "suppose we have private road . . . Is there still an externality? Nope." Don't you still get inefficiency (given congestion externalities) even with private ownership? e.g. see my answer where I assume that competition (and private ownership) leads to marginal cost pricing. [To be clear, I'm not saying you are wrong; it's just not yet clear to me how private ownership solves the problem.]
afreelunch
CC BY-SA 4.0
2021-11-17T12:26:05.113Z
@1muflon1 I guess one idea is that the private owner should maximise total customer surplus so that they can extract maximum payments. Is that your idea? If so, does this always hold, or just under monopoly?
afreelunch
CC BY-SA 4.0
2021-11-17T13:00:09.850Z
@afreelunch it solves the problem assuming no other market failures. 1. First no externality does not mean no cost. Even in social optimum there will be pollution and congestion etc. that’s just fact. Socially optimum quantities will be lower since externalities lead to overproduction but they won’t be zero. Hence we do not want to solve here problem of congestion per se but problem of externality that results in above optimum level of congestion.
1muflon1
CC BY-SA 4.0
2021-11-17T13:03:58.787Z
@afreelunch 2. If there is toll booth for this highway and price there is determined by supply and demand then when the demand is high (given the fixed supply of space) toll we be high reflecting the fact the space is scarce. Then other drivers will have choice to pay this higher price that fully reflects the scarcity of the space or not to pay it. If they pay the price they do contribute to further congestion but there isn’t an externality the congestion is already priced in.
1muflon1
CC BY-SA 4.0
2021-11-17T13:05:24.460Z
@1muflon1 yes that's a good point. But what if it's just unpleasant to be on a crowded bus (e.g. because you need to stand up). Under perfect competition, will this be factored into the market price? [I am open to the idea that the answer is 'yes' -- I just need someone to explain why!]
afreelunch
CC BY-SA 4.0
2021-11-17T13:06:20.220Z
@afreelunch 3. I did not meant to say that private ownership is panacea for externalities but in this case it would be a solution. Often externalities can be resolved by establishing private rights. Commons will be riddled with externalities private pastures not so much. 4. I don’t understand your point about monopoly. Monopoly is unrelated to externalities. 5. Again not see your point about total consumer surplus. Social efficiency is about total surplus - price discriminating monopoly will result in absolutely efficient allocation yet consumer surplus is 0
1muflon1
CC BY-SA 4.0
2021-11-17T13:09:10.127Z
@afreelunch yes it would be priced in. For example, in EU interstate buses (buses between different EU countries) charge different prices based on day and sometimes even hour not just day (eg morning ticket can be less expensive then ticket in middle of the day or late in the night). Even with this there might be congestion inside bus but there would not be an externality (although you typically buy seats like on plane with ticket). Of course city buses that charge flat fee might suffer from externalities because there price does not change to reflect market conditions
1muflon1
CC BY-SA 4.0
2021-11-17T13:10:10.133Z
@1muflon1 I was thinking of the case where the bus is privately owned. (If it's owned by the state, anything can happen, depending on whether the state sets prices optimally or not.) What about that case? (PS I am asking what would happen "in theory". I think we can agree that, in practice, private buses do not always vary prices optimally to reflect how crowded the bus is, just as public buses don't always do this.)
afreelunch
CC BY-SA 4.0
2021-11-17T13:15:15.383Z
@afreelunch see my previous comment the same applies. Thing is that buses are fundamentally different than let’s say CO2 emission which private companies could not solve (ok there is Coase theorem but you know what I mean). In private buses all seats are owned by the bus, the bus owner gets all the benefit of filling them as well as pays all the costs of filling them. There is no mismatch of social and private costs here. In the same way bus goer gets to enjoy all the pleasures and pains of that bus ride congested or uncongested. So there is again no mismatch between private and social m.util
1muflon1
CC BY-SA 4.0
2021-11-17T15:33:11.237Z
Can you explain how exactly this happens under perfect competition? e.g. if firms price at the marginal cost of production, and this is a constant, then prices will *not* reflect "the pains of the bus ride" (right?)
afreelunch
CC BY-SA 4.0
2021-11-17T16:55:59.820Z
@afreelunch I honestly not sure why you believe pricing at marginal cost should lead to externality. That only occurs when marginal private and societal costs are different (eg pollution where wider society (3rd party) has to experience the cost of pollution not just buyers and sellers). Within a bus when it comes to the seats all costs borne by buyers and sellers. For example, if supply is given by 10+p (and recall that for markets with well defined supply, the supply is derived directly from marginal cost - for perfect completion supply = MC curve). Next price is not set up by firms
1muflon1
CC BY-SA 4.0
2021-11-17T16:59:54.990Z
Unilaterally but also depending on demand. So if demand is for example 100-2p we would get equilibrium price at point where Q_S=Q_d so equilibrium price would 10+p=100-2p => p=30 and you can draw a picture of this yourself and you will see that at this price total surplus will be maximized and there are no externalities. Also by the way the price will be at point where MC=MU (since demand is derived from marginal utility and supply from marginal cost curve). Now to introduce externality we would have to assume that there is some extra social cost to the transportation for example bus CO2
1muflon1
CC BY-SA 4.0
2021-11-17T17:04:11.340Z
Now if the bus makes CO2 emissions this does not affect just sellers (bus) and buyers (travelers) but also other people on the street. Consequently, now there is extra societal cost not reflected in the marginal cost of the firm. If there is this external cost the MC will be the “wrong” cost curve from society’s point of view. The correct cost curve would be the societal marginal cost (SMC) where SMC=MC+externality. Now if there is this externality then the price P=30 would be wrong price. If externality is extra flat 10 cost then the societally “correct” supply should be 20+p.
1muflon1
CC BY-SA 4.0
2021-11-17T17:06:19.730Z
In this case where external 3rd party effect are there pricing at marginal cost would lead to suboptimal allocation, but so would pricing at any other value (except pricing at societal marginal cost). But this is not the same situation as inside the bus where all costs are already in the MC and where all benefits or pains or taking the train are factored in marginal utilities of passengers (again marginal utility gives you demand)
1muflon1
CC BY-SA 4.0
2021-11-15T23:07:23.000Z
2021-11-16T23:25:57.440Z
2021-11-16T23:25:57.440Z
1muflon1
<p>Effects that follow from rivalry are usually not considered to be economic externalities.
From <a href="https://en.wikipedia.org/wiki/Rivalry_(economics)" rel="nofollow noreferrer">Wikipedia</a>:</p>
<blockquote>
<p>In economics, a good is said to be rivalrous or a rival if its consumption by one consumer prevents simultaneous consumption by other consumers, or if consumption by one party reduces the ability of another party to consume it. A good is considered non-rivalrous or non-rival if, for any level of production, the cost of providing it to a marginal (additional) individual is zero.</p>
</blockquote>
<p>E.g., a supplier being present on the market increases aggregate supply and may push down the equilibrium price. This is detrimental to other suppliers. However, this is not a negative externality, this is how the market is supposed to work (competition, rivalry); in case of perfect competition the equilibrium allocation is an efficient one.</p>
<p>Similarly, if you buy a piece of chocolate in the store, and that chocolate is no longer available to me, that is also not a negative externality, this is a normal function of the market. The same goes for seats on public transport (or in the theater).</p>

CC BY-SA 4.0
2021-11-16T20:37:18.177Z
Isn't the more relevant question whether the logic of externalities applies here? (Whether or not people conventionally call congestion externalities 'externalities')
afreelunch
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2021-11-16T20:38:35.167Z
@afreelunch Could be! I am not sure what you mean by that though.
Giskard
CC BY-SA 4.0
2021-11-16T20:45:22.330Z
I should perhaps add that, even if are looking for the "conventional" definition here, it is very standard to talk about "congestion externalities". You will find lots of papers on this written by urban economics people
(PS I'm not sure about your perfect competition point, usually we require a continuum of firms which seems to complicate matters...)
afreelunch
CC BY-SA 4.0
2021-11-15T08:50:22.407Z
2021-11-16T11:02:37.193Z
2021-11-16T11:02:37.193Z
Giskard
<p>Short answer: yes, it makes sense to call this an externality. (In the literature, these are called <a href="https://scholar.google.com/scholar?hl=en&amp;as_sdt=0%2C5&amp;q=congestion%20externalities&amp;btnG=" rel="nofollow noreferrer">congestion externalities</a>).</p>
<hr />
<p>To elaborate:</p>
<p>While one can define ‘externality’ how one likes, the more interesting question is the following: <em>will an efficient number of people choose to take the bus (as opposed to driving)</em>?</p>
<p>To simplify matters, assume (for now) that the only relevant difference between the two options, as far as bystanders as concerned, is that you can take somebody’s seat by taking the bus. In other words, ignore the fact that taking the bus is probably better for the environment. Let's also assume that bus trips have a constant marginal cost, and that bus tickets are priced at this marginal cost. (This would be true, for example, under Bertrand competition with zero fixed costs; or if the buses are public and so priced to ensure zero profits.)</p>
<p>Under these assumptions (plus some technical assumptions I'm going to smuggle in...), one can show that too many people will take the bus.</p>
<p>Here’s why. Ideally, a person takes the bus if and only if the benefit of their taking the bus exceeds the total social cost. However, if we assume that they are selfish, they will take the bus if and only if the benefit of their taking the bus exceeds their <em>private</em> cost, which we've assumed is just the marginal cost of a bus trip. And this can lead to inefficiency.</p>
<p>In case this isn't clear, here's an example:</p>
<ul>
<li>Suppose that I get £2 of benefits from taking the bus (this is my 'willingness to pay').</li>
<li>Suppose that taking the bus costs me £1, which is also the marginal cost of a trip.</li>
<li>Finally, suppose that if I take the bus, I'll take Bob's seat, which he values at £10.</li>
</ul>
<p>Under these assumptions, I'll take the bus (the £2 benefit exceeds the £1 cost). But I shouldn't, at least from an efficiency standpoint, since the total social cost (£1 + £10 = £11) exceeds the private benefit (£2).</p>
<p>By the way, this is <strong>exactly</strong> the reason why negative externalities lead to overproduction in general. (If you consult a textbook, you’ll find more formal versions of the argument above which explain the precise assumptions you need to make in order to make the argument work.) So whether or not you want to call this an 'externality', it functions just like an externality in the basic microeconomic model. To my mind, this justifies calling it an externality.</p>
<p>Of course, you'll also want to take account of pollution in your model. That's fine -- it can be handled in exactly the same framework. The only complication is that now you have an externality in the opposite direction (and so acknowledging this externality suggests that too few might take the bus). To see which externality is larger, you'll need to calculate which leads to larger (monetised) losses, which in turn requires summing willingness to avoid estimates across the third parties involved.</p>
<p><strong>Edit</strong>: I want to emphasise that this problem does <em>not</em> arise if congestion costs are appropriately factored into market prices. The point of the story above is to show how they do <em>not</em> need to be factored into market prices (e.g. under perfect competition with constant marginal costs). It is this which can lead to the externality problem.</p>

CC BY-SA 4.0
2021-11-16T20:36:34.287Z
The inefficiency seems to result from a bad price, not an externality? If the marginal cost of the ride was £1 but they charged £100 dollars per ticket so Bob (who values the ride at £10) does not buy one, that is also an inefficiency. But perhaps you would not call that an externality? What is different between these two cases of setting bad prices?
Giskard
CC BY-SA 4.0
2021-11-16T20:38:12.193Z
Yes, that's exactly right. If you use congestion pricing, you can eliminate the adverse effects of congestion externalities. Similarly, if you use Pigou taxes, you can eliminate the effects of pollution externalities. Note that in both cases (pollution and congestion), a profit maximising firm will *not* set the efficient price.
afreelunch
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2021-11-16T20:38:57.013Z
This does not answer my question, though I did make an edit to my comment and perhaps you wrote yours before seeing it.
Giskard
CC BY-SA 4.0
2021-11-16T20:42:01.230Z
Sorry, I read too quickly! Yes I'm happy to call both cases an externality. In fact, the reason why externalities can lead to inefficiency, and the reason why market power can lead to inefficiency, are (I believe) the same.
afreelunch
CC BY-SA 4.0
2021-11-16T20:42:43.827Z
i.e. the problem with monopoly (in basic micro models) is that they charge high prices without caring about the effects these prices have on consumers... just like an externality!
afreelunch
CC BY-SA 4.0
2021-11-16T23:23:12.373Z
@afreelunch but monopoly pricing in itself does not create externalities. Externality is not any situation where market is allocatively not efficient. It is a situation where there are third party negative or positive effects in other markets
WilliamT
CC BY-SA 4.0
2021-11-17T11:45:33.733Z
@WilliamT I think you are getting a bit hung up on textbook definitions. The more interesting question is whether the logic of externalities applies in these cases (e.g. congestion, monopoly). In fact, it does.
P.S. Even if you just want to mimic standard definitions, it is completely standard (in the academic literature) to talk about congestion externalities. If you Google this, you'll see what I mean.
afreelunch
CC BY-SA 4.0
2021-11-17T12:30:05.703Z
@afreelunch it's not about what is written in textbook. Okay, think about this like this: both falling from a cliff or getting malaria can kill a person. Does that mean falling from the cliff is the same process as contracting malaria? Market inefficiency can be result of many different things. Principal agent problems, missing markets, externalities, some behavioral failures (hyperbolic discounting, adaptive expectations), market power (which is the case of monopoly) and many more.
WilliamT
CC BY-SA 4.0
2021-11-17T12:32:35.803Z
@afreelunch I think congestion externalities refer to, well..., congestion, like trafic jams. Here the problem is that the use of a road is not priced so too many people take the road without considering the delays this causes for other people. I don't think taking a seat on a bus relates to the same problem.
tdm
CC BY-SA 4.0
2021-11-17T12:34:00.433Z
@tdm But it's basically the same phenomenon right? e.g. 1) if I drive, that will slow other drivers down (harming them) 2) if I take the bus, that will somebody else's seat (harming them)
afreelunch
CC BY-SA 4.0
2021-11-17T12:34:01.133Z
@afreelunch You are picking one category of market failure (which is the right umbrella term) called externality, and then you are saying ignore what is in the textbook, my preferred sub-category of  market failure (externality) will be name for all market failures, because externality like all market failures results in allocation that is not efficient. I find that unnecessarily confusing, we already have the name market failure. I personally don't like when people willy-nilly rename things that already have name for no good reason.
WilliamT
CC BY-SA 4.0
2021-11-17T12:35:09.407Z
@WilliamT If you read my answer, you'll see that this is not at all what I am saying! [In fact, I don't even care how you define externality... if you read the answer, you'll see this is not an important point. What matters is understanding if the *logic* of the standard externality argument applies here or not.]
afreelunch
CC BY-SA 4.0
2021-11-17T12:37:45.583Z
@afreelunch I am sorry but this is what I read in your answer. Maybe it is not what you wanted to say and I don't understand you or you did not sufficiently explained what you mean. Also if you think my comment does not make sense ignore it. I just wanted to point out that market power is not externality for you or someone else who might read this. That's all.
WilliamT
CC BY-SA 4.0
2021-11-17T12:38:42.353Z
@WilliamT My answer does not even mention market power. Please do read the answer to see if you find it persuasive (and let me know if I have missed anything).
afreelunch
CC BY-SA 4.0
2021-11-17T12:39:39.603Z
@afreelunch sorry, I meant comment, I think of all of this as part of an answer
WilliamT
CC BY-SA 4.0
2021-11-17T12:40:20.557Z
@afreelunch The difference is that if I take the bus, I pay a ticket. Whereas if I drive more on the road, I'm not paying for this extra use of the road. There is a market for bus tickets, so this is not an externality. There is no market for buying "use of road tickets" so this generates a potential externality.
tdm
CC BY-SA 4.0
2021-11-17T12:41:04.123Z
@tdm Agree, that's a good point. But I don't see why market prices need to be optimal here (e.g. imagine if they price at marginal cost, as in my answer). So even if it's private, I think that you can get too many taking the bus -- for exactly the reason why negative externalities lead to overproduction in general. [I think this depends on a bit on the market structure, so this is a delicate issue... Unlike perfect competition, I think a market monopolist would actually choose the price that leads to the efficient allocation.]
afreelunch
CC BY-SA 4.0
2021-11-17T12:44:53.663Z
@afreelunch If demand exceeds supply for bus seats, then prices should go up. Then you can ask the questions why there are no seats available on the bus for everyone willing to buy a ticket: maybe there is monopoly power, or maybe there are barriers to entry in the bus industry. Whatever market failure is present here, I think this is another question that is not really related to a congestion externality.
tdm
CC BY-SA 4.0
2021-11-17T12:44:58.217Z
@afreelunch by the way, this is another problem externalities exist not when firms price things at marginal costs, but when marginal private costs do not include marginal social cost ($MC \neq MSC$) in equilibrium without externality market price will occur at point where marginal cost equals marginal benefit (or marginal utility) $MC=MB$ and where $MC=MSC$ and $MB=MSB$. If $MSC>MC$ we have negative externality. If $MSB>MB$ we have positive externality.
WilliamT
CC BY-SA 4.0
2021-11-17T12:47:39.973Z
@tdm I wasn't really thinking of a capacity constraint. Rather, I was imagining that it is *unpleasant* if many take the bus (e.g. because you need to stand up). Under Bertrand competition with constant marginal costs, I don't see how this externality is factored into the price. However, under other market structures, it may be.
afreelunch
CC BY-SA 4.0
2021-11-17T12:55:13.403Z
Though I guess if marginal costs are constant, you shouldn't really get congestion... As I say, I think this is a delicate issue (and I'm open to the idea that I'm wrong about this!)
afreelunch
CC BY-SA 4.0
2021-11-16T19:38:59.280Z
2021-11-17T12:51:55.350Z
2021-11-17T12:51:55.350Z
afreelunch
<p>I was in a discussion about externalities surrounding private and public transport.</p>
<p>Someone argued that by taking a car they are creating a positive externality by not taking up a seat on a bus or train. My gut reaction is no that's wrong. But that was because I was focussing on congestion, pollution, accidents.</p>
<p>However their argument seems to be right according to the &quot;dictionary definition&quot; of externality and viewing it in isolation.</p>
<p>What say you, economics community? Are they correct or is there something in the small print of externalities of consumption, when it comes to substitute goods?</p>

CC BY-SA 4.0
2021-11-15T22:21:07.037Z
You may like to look at answers to previous questions [here](https://economics.stackexchange.com/questions/36556/is-the-use-consumption-of-natural-resources-considered-an-externality-per-se) and [here](https://economics.stackexchange.com/questions/36561/is-there-any-academic-source-that-uses-the-following-standard-broad-definition) which suggest that it is difficult to discern any consensus among economists on the definition of an externality.
Adam Bailey
CC BY-SA 4.0
2021-11-17T15:40:17.527Z
Thanks for all your excellent input. It looks like I opened a real can of worms here. 

I have always used the simplistic definition that an externality is an impact on a third party from the consumption of a good.
So from this a free seat on PT would be a positive externality. But we would never say that me drinking Coke means that there is a positive externality of more Pepsi being available for other people. 

Finally, the twist here, is that the car/PT positive externality comes right out of "Economics" by Mankiw. 5th edition page 205.
Studi
<environmental-economics><externalities><transportation>
Positive externalities of cars - free seats on public transport
Studi
# Positive externalities of cars - free seats on public transport

(Asked by: username_0 on 2021-11-15)

I was in a discussion about externalities surrounding private and public transport.

Someone argued that by taking a car they are creating a positive externality by not taking up a seat on a bus or train. My gut reaction is no that's wrong. But that was because I was focussing on congestion, pollution, accidents.

However their argument seems to be right according to the "dictionary definition" of externality and viewing it in isolation.

What say you, economics community? Are they correct or is there something in the small print of externalities of consumption, when it comes to substitute goods?

**Tags:** environmental-economics, externalities, transportation

> **Comments:**
> **username_1**: You may like to look at answers to previous questions [here](https://economics.stackexchange.com/questions/36556/is-the-use-consumption-of-natural-resources-considered-an-externality-per-se) and [here](https://economics.stackexchange.com/questions/36561/is-there-any-academic-source-that-uses-the-following-standard-broad-definition) which suggest that it is difficult to discern any consensus among economists on the definition of an externality.  
> **username_0**: Thanks for all your excellent input. It looks like I opened a real can of worms here.   I have always used the simplistic definition that an externality is an impact on a third party from the consumption of a good. So from this a free seat on PT would be a positive externality. But we would never say that me drinking Coke means that there is a positive externality of more Pepsi being available for other people.   Finally, the twist here, is that the car/PT positive externality comes right out of "Economics" by Mankiw. 5th edition page 205.  

---

## 3 answers

### Answer by username_2 on 2021-11-15. Score: 5

In order to answer this question we first have to properly and rigorously define externality. Externalities are often vaguely defined as any effects on third parties but the correct definition of externality is more nuanced.

Mas-Colell Whinston Green (1995) Microeconomic theory states:

> "Definition "11.B.1 An externality is present whenever the well-being of a consumer or the production possibilities of a firm are directly affected by the actions of another agent in the economy." .... "When we say 'directly,' we mean to exclude any effects that are mediated by prices.

Mas-Colell Whinston Green (1995) is the most widely used graduate microeconomic text in the world, hence I would consider it authoritative source for a definition of externality. Moreover, most (good) textbooks exclude effects mediated by prices as well (see Mankiw and Taylor (2014) Mankiw (2018) Principles of economics or Cowen & Tabarok Modern Principles of Economics).

Furthermore, your problem is missformulated. Removing congestion from public transport would not be positive externality but reduction in negative externality of consuming public transport (assuming there is any). For example, I do not know of any paper or book that would consider firm that chooses to pollute less (where pollution is negative externality) being positive externality. Reduction in negative externality is reduction in negative externality, not introduction of positive one.

Consequently, in your case the question can be reformulated as:

*Is congesting public transport by using it creating negative externality?*

Answer is no if we assume that otherwise the market is well functioning and prices are determined by demand and supply. The reason for that is that the negative effect of you congesting public transport by sitting there is already priced in your public transport ticket. So here the external negative effect is already fully internalized in the price of the ticket (assuming no further market failures).

---

**Edit:**

As pointed out in the comments this answer assumes that public transport actually prices its tickets using market prices. I interpreted the question as a hypothetical, but of course in real life it is empirical question if public transport actually uses market prices or not.

Of course, this is not always the case. In some countries public transport is not private, in some it is public-private partnership etc. Also, there is often difference between travelling locally (within city) and more broadly.

A lot of trains in the Europe actually do price their ticket based on the market demand. For example, you can see on the website [Omio](https://www.omio.com/search-frontend/results/EB00C987155134D3AA41F78712E609380/bus?locale=en) (price comparison site), that the bus route between Amsterdam and Frankfurt is priced differently on different days (presumably reflecting among other things congestion). You can also see the same for trains [here](https://www.omio.com/search-frontend/results/EB00C987155134D3AA41F78712E609380/train?locale=en). Hence for these buses and trains any 3rd party effect would be already priced in and there would not be any externality.

However, of course, empirically there are many cities where public transport prices are fixed, or determined not by market forces. In such cases price would clearly not price in the 3rd party effects save for special case where the prices is fixed at what would be market level.

---

PS: Even if you would not like my reformulation, the above shows that congesting public transport does not create externalities, because whatever the congestion is, it is priced in the the ticket, so by extension claiming you not using it creates positive externality would be a contradiction, given that we already showed in case of public transport the external effects are priced in the ticket.

> **Comments:**
> **username_2**: @username_3 what do you mean? 1. I tried to provide something I thought is better answer.  2. I did not downvoted your answer (if that is why you are asking), I think your answer is also ok but bit convoluted I think my answer is clearer and it addresses the problem in more direct way through definition of externality directly  
> **username_3**: I deleted my comment within 30 seconds of posting it, because I realized this would come down to a matter of taste/opinion. I find my shorter answer less convoluted (: I find "mediated by prices" to be kind of vague, it does not explain the underlying mechanism. I also think [username_1 username_1's comment](https://economics.stackexchange.com/questions/48386/positive-externalities-of-cars-free-seats-on-public-transport/48387#comment78000_48386) is the best answer of them all.  
> **username_2**: @username_3 I guess you are right about the taste part but what do you mean does not explain the mechanism? The first thing you learn about externalities is that they are bad precisely because they are not priced in the prices of goods and services, causing market allocation not to be socially optimal  
> **username_3**: I understand that the equilibrium allocation is not optimal, I write as much in my answer. Are you saying that there are no externalities when prices don't exists? If not, then what exactly do you mean with "mediated by prices"?  
> **username_3**: P.s. I dislike signalling my non-negative votes, but to avoid seeming malicous I will also write that the downvote on your answer is not by me - I comment on my non-homework downvotes. I guess we deserve the downvote for not writing about the lack of clear definitions (:  
> **username_2**: @username_3 no rather I say the opposite, I say 3rd party effects that are priced in are not externalities.  
> **username_1**: "the negative effect of you congesting public transport ... is already priced in your transport ticket".  Doesn't that depend on how tickets are priced?  Would it be so if the ticket price was always the same, whether the bus/train was crowded or nearly empty?  
> **username_2**: @username_1 well I assumed that there are no further market failures but you are right if there are some price controls that fix the prices the “incorrect” prices would not internalize the externality  
> **username_4**: I agree that there exists *some* price that leads to the efficient number of bus trips. (This is the 'Pigou price' which factors in the harm you do to others when you take the bus.) But like @username_1 I don't see evidence that actual public transport operators charge this 'Pigou price'.  
> **username_2**: @username_4 well that depends on what country and place we are talking about. For example, in EU many interstate railways (railways are traditionally considered public transport) charge different price of train ticket depending on day and so on (I know this well because I use rails often, living in the Netherlands but not originally being born here). The same holds for long trip busses. In case of city public transport I agree they typically just have some set price set by regulator, most city transports are not even private but I interpret the OP as asking a hypothetical question  
> **username_2**: @username_4 I also further edited my answer to address this issue by the way  
> **username_4**: Yes I agree with these points. One further point I would make: you say that there's no negative externality if the harm I do to others when I take the bus is priced in (using Pigou pricing). In a sense, that's true. But it's only true in the sense that there's no negative externality from carbon emissions if individuals are subject to an optimally chosen carbon tax. In both cases, it may be more natural to say that there is an externality, but it can be corrected by changing the price.  
> **username_2**: @username_4 actually, that would not be correct to say according to the definition by MWG. Since by MWG definition, only 3rd party effects not priced are considered externality. With the carbon tax, well there the price does not capture the external effect, but price + tax does  
> **username_4**: In my view, the definition doesn't matter. What matters is understanding that the *logic* of externalities exactly applies here. (I guess I should expand this comment into an answer...)  
> **username_2**: @username_4 I mean you can of course disagree with the MWG definition, but actually few years ago I was looking into this because I have argument about this with other person and I was not able to find a single textbook with an example where effect that is priced in would be considered externality and I look at everything from Mankiws principles to Varian  
> **username_2**: @username_4 well but definition matters. For example, if I define A=2 statement A is a prime is logical statement. If I define A = 8 stating A is prime is not valid or logical  
> **username_4**: I've just typed up an answer, hopefully it will clarify what I mean when I say that the standard logic of externalities applies (regardless of whether you want to call this an externality, and regardless of what various textbook authors say in their books).  
> **username_4**: @username_2 Incidentally, what do you make of the literature on congestion externalities? Is everyone there using the term incorrectly?  
> **username_2**: @username_4 no they are using the word externalities there correctly. But congestion by itself =/= externality. For example on a public road which is provided free of charge through non-market mechanism, there are no prices to mediate the 3rd party effects so sure there will be negative externality of congestion. But now suppose we have private road and terrain is such that it is feasible to have toll booth at both sides of the road. Next suppose the road entrance is priced by supply and demand. Is there still an externality? Nope. Existence of externality is conditioned on market conditions  
> **username_2**: @username_4 incidentally if you re-read my answer you will note i corrected my mistake. I originally said bus seat congestion won’t be and externality and left it at that. Now my new edited answer says there won’t be externality if the tickets are priced by the supply and demand (and there are no further market failures for example in CO2 emission there is no property right for clean air so without Pigouvian tax supply and demand would miss the externality - but with buss there is no such issue). But if the bus is priced differently by fiat or provided free  there would be an externality  
> **username_4**: @username_2 What I don't get is the following: "suppose we have private road . . . Is there still an externality? Nope." Don't you still get inefficiency (given congestion externalities) even with private ownership? e.g. see my answer where I assume that competition (and private ownership) leads to marginal cost pricing. [To be clear, I'm not saying you are wrong; it's just not yet clear to me how private ownership solves the problem.]  
> **username_4**: @username_2 I guess one idea is that the private owner should maximise total customer surplus so that they can extract maximum payments. Is that your idea? If so, does this always hold, or just under monopoly?  
> **username_2**: @username_4 it solves the problem assuming no other market failures. 1. First no externality does not mean no cost. Even in social optimum there will be pollution and congestion etc. that’s just fact. Socially optimum quantities will be lower since externalities lead to overproduction but they won’t be zero. Hence we do not want to solve here problem of congestion per se but problem of externality that results in above optimum level of congestion.  
> **username_2**: @username_4 2. If there is toll booth for this highway and price there is determined by supply and demand then when the demand is high (given the fixed supply of space) toll we be high reflecting the fact the space is scarce. Then other drivers will have choice to pay this higher price that fully reflects the scarcity of the space or not to pay it. If they pay the price they do contribute to further congestion but there isn’t an externality the congestion is already priced in.  
> **username_4**: @username_2 yes that's a good point. But what if it's just unpleasant to be on a crowded bus (e.g. because you need to stand up). Under perfect competition, will this be factored into the market price? [I am open to the idea that the answer is 'yes' -- I just need someone to explain why!]  
> **username_2**: @username_4 3. I did not meant to say that private ownership is panacea for externalities but in this case it would be a solution. Often externalities can be resolved by establishing private rights. Commons will be riddled with externalities private pastures not so much. 4. I don’t understand your point about monopoly. Monopoly is unrelated to externalities. 5. Again not see your point about total consumer surplus. Social efficiency is about total surplus - price discriminating monopoly will result in absolutely efficient allocation yet consumer surplus is 0  
> **username_2**: @username_4 yes it would be priced in. For example, in EU interstate buses (buses between different EU countries) charge different prices based on day and sometimes even hour not just day (eg morning ticket can be less expensive then ticket in middle of the day or late in the night). Even with this there might be congestion inside bus but there would not be an externality (although you typically buy seats like on plane with ticket). Of course city buses that charge flat fee might suffer from externalities because there price does not change to reflect market conditions  
> **username_4**: @username_2 I was thinking of the case where the bus is privately owned. (If it's owned by the state, anything can happen, depending on whether the state sets prices optimally or not.) What about that case? (PS I am asking what would happen "in theory". I think we can agree that, in practice, private buses do not always vary prices optimally to reflect how crowded the bus is, just as public buses don't always do this.)  
> **username_2**: @username_4 see my previous comment the same applies. Thing is that buses are fundamentally different than let’s say CO2 emission which private companies could not solve (ok there is Coase theorem but you know what I mean). In private buses all seats are owned by the bus, the bus owner gets all the benefit of filling them as well as pays all the costs of filling them. There is no mismatch of social and private costs here. In the same way bus goer gets to enjoy all the pleasures and pains of that bus ride congested or uncongested. So there is again no mismatch between private and social m.util  
> **username_4**: Can you explain how exactly this happens under perfect competition? e.g. if firms price at the marginal cost of production, and this is a constant, then prices will *not* reflect "the pains of the bus ride" (right?)  
> **username_2**: @username_4 I honestly not sure why you believe pricing at marginal cost should lead to externality. That only occurs when marginal private and societal costs are different (eg pollution where wider society (3rd party) has to experience the cost of pollution not just buyers and sellers). Within a bus when it comes to the seats all costs borne by buyers and sellers. For example, if supply is given by 10+p (and recall that for markets with well defined supply, the supply is derived directly from marginal cost - for perfect completion supply = MC curve). Next price is not set up by firms  
> **username_2**: Unilaterally but also depending on demand. So if demand is for example 100-2p we would get equilibrium price at point where Q_S=Q_d so equilibrium price would 10+p=100-2p => p=30 and you can draw a picture of this yourself and you will see that at this price total surplus will be maximized and there are no externalities. Also by the way the price will be at point where MC=MU (since demand is derived from marginal utility and supply from marginal cost curve). Now to introduce externality we would have to assume that there is some extra social cost to the transportation for example bus CO2  
> **username_2**: Now if the bus makes CO2 emissions this does not affect just sellers (bus) and buyers (travelers) but also other people on the street. Consequently, now there is extra societal cost not reflected in the marginal cost of the firm. If there is this external cost the MC will be the “wrong” cost curve from society’s point of view. The correct cost curve would be the societal marginal cost (SMC) where SMC=MC+externality. Now if there is this externality then the price P=30 would be wrong price. If externality is extra flat 10 cost then the societally “correct” supply should be 20+p.  
> **username_2**: In this case where external 3rd party effect are there pricing at marginal cost would lead to suboptimal allocation, but so would pricing at any other value (except pricing at societal marginal cost). But this is not the same situation as inside the bus where all costs are already in the MC and where all benefits or pains or taking the train are factored in marginal utilities of passengers (again marginal utility gives you demand)  

---

### Answer by username_3 on 2021-11-15. Score: 3

Effects that follow from rivalry are usually not considered to be economic externalities.
From [Wikipedia](https://en.wikipedia.org/wiki/Rivalry_(economics)):

> In economics, a good is said to be rivalrous or a rival if its consumption by one consumer prevents simultaneous consumption by other consumers, or if consumption by one party reduces the ability of another party to consume it. A good is considered non-rivalrous or non-rival if, for any level of production, the cost of providing it to a marginal (additional) individual is zero.

E.g., a supplier being present on the market increases aggregate supply and may push down the equilibrium price. This is detrimental to other suppliers. However, this is not a negative externality, this is how the market is supposed to work (competition, rivalry); in case of perfect competition the equilibrium allocation is an efficient one.

Similarly, if you buy a piece of chocolate in the store, and that chocolate is no longer available to me, that is also not a negative externality, this is a normal function of the market. The same goes for seats on public transport (or in the theater).

> **Comments:**
> **username_4**: Isn't the more relevant question whether the logic of externalities applies here? (Whether or not people conventionally call congestion externalities 'externalities')  
> **username_3**: @username_4 Could be! I am not sure what you mean by that though.  
> **username_4**: I should perhaps add that, even if are looking for the "conventional" definition here, it is very standard to talk about "congestion externalities". You will find lots of papers on this written by urban economics people (PS I'm not sure about your perfect competition point, usually we require a continuum of firms which seems to complicate matters...)  

---

### Answer by username_4 on 2021-11-16. Score: 1

Short answer: yes, it makes sense to call this an externality. (In the literature, these are called [congestion externalities](https://scholar.google.com/scholar?hl=en&as_sdt=0%2C5&q=congestion%20externalities&btnG=)).

---

To elaborate:

While one can define ‘externality’ how one likes, the more interesting question is the following: *will an efficient number of people choose to take the bus (as opposed to driving)*?

To simplify matters, assume (for now) that the only relevant difference between the two options, as far as bystanders as concerned, is that you can take somebody’s seat by taking the bus. In other words, ignore the fact that taking the bus is probably better for the environment. Let's also assume that bus trips have a constant marginal cost, and that bus tickets are priced at this marginal cost. (This would be true, for example, under Bertrand competition with zero fixed costs; or if the buses are public and so priced to ensure zero profits.)

Under these assumptions (plus some technical assumptions I'm going to smuggle in...), one can show that too many people will take the bus.

Here’s why. Ideally, a person takes the bus if and only if the benefit of their taking the bus exceeds the total social cost. However, if we assume that they are selfish, they will take the bus if and only if the benefit of their taking the bus exceeds their *private* cost, which we've assumed is just the marginal cost of a bus trip. And this can lead to inefficiency.

In case this isn't clear, here's an example:

* Suppose that I get £2 of benefits from taking the bus (this is my 'willingness to pay').
* Suppose that taking the bus costs me £1, which is also the marginal cost of a trip.
* Finally, suppose that if I take the bus, I'll take Bob's seat, which he values at £10.

Under these assumptions, I'll take the bus (the £2 benefit exceeds the £1 cost). But I shouldn't, at least from an efficiency standpoint, since the total social cost (£1 + £10 = £11) exceeds the private benefit (£2).

By the way, this is **exactly** the reason why negative externalities lead to overproduction in general. (If you consult a textbook, you’ll find more formal versions of the argument above which explain the precise assumptions you need to make in order to make the argument work.) So whether or not you want to call this an 'externality', it functions just like an externality in the basic microeconomic model. To my mind, this justifies calling it an externality.

Of course, you'll also want to take account of pollution in your model. That's fine -- it can be handled in exactly the same framework. The only complication is that now you have an externality in the opposite direction (and so acknowledging this externality suggests that too few might take the bus). To see which externality is larger, you'll need to calculate which leads to larger (monetised) losses, which in turn requires summing willingness to avoid estimates across the third parties involved.

**Edit**: I want to emphasise that this problem does *not* arise if congestion costs are appropriately factored into market prices. The point of the story above is to show how they do *not* need to be factored into market prices (e.g. under perfect competition with constant marginal costs). It is this which can lead to the externality problem.

> **Comments:**
> **username_3**: The inefficiency seems to result from a bad price, not an externality? If the marginal cost of the ride was £1 but they charged £100 dollars per ticket so Bob (who values the ride at £10) does not buy one, that is also an inefficiency. But perhaps you would not call that an externality? What is different between these two cases of setting bad prices?  
> **username_4**: Yes, that's exactly right. If you use congestion pricing, you can eliminate the adverse effects of congestion externalities. Similarly, if you use Pigou taxes, you can eliminate the effects of pollution externalities. Note that in both cases (pollution and congestion), a profit maximising firm will *not* set the efficient price.  
> **username_3**: This does not answer my question, though I did make an edit to my comment and perhaps you wrote yours before seeing it.  
> **username_4**: Sorry, I read too quickly! Yes I'm happy to call both cases an externality. In fact, the reason why externalities can lead to inefficiency, and the reason why market power can lead to inefficiency, are (I believe) the same.  
> **username_4**: i.e. the problem with monopoly (in basic micro models) is that they charge high prices without caring about the effects these prices have on consumers... just like an externality!  
> **username_5**: @username_4 but monopoly pricing in itself does not create externalities. Externality is not any situation where market is allocatively not efficient. It is a situation where there are third party negative or positive effects in other markets  
> **username_4**: @username_5 I think you are getting a bit hung up on textbook definitions. The more interesting question is whether the logic of externalities applies in these cases (e.g. congestion, monopoly). In fact, it does. P.S. Even if you just want to mimic standard definitions, it is completely standard (in the academic literature) to talk about congestion externalities. If you Google this, you'll see what I mean.  
> **username_5**: @username_4 it's not about what is written in textbook. Okay, think about this like this: both falling from a cliff or getting malaria can kill a person. Does that mean falling from the cliff is the same process as contracting malaria? Market inefficiency can be result of many different things. Principal agent problems, missing markets, externalities, some behavioral failures (hyperbolic discounting, adaptive expectations), market power (which is the case of monopoly) and many more.  
> **username_6**: @username_4 I think congestion externalities refer to, well..., congestion, like trafic jams. Here the problem is that the use of a road is not priced so too many people take the road without considering the delays this causes for other people. I don't think taking a seat on a bus relates to the same problem.  
> **username_4**: @username_6 But it's basically the same phenomenon right? e.g. 1) if I drive, that will slow other drivers down (harming them) 2) if I take the bus, that will somebody else's seat (harming them)  
> **username_5**: @username_4 You are picking one category of market failure (which is the right umbrella term) called externality, and then you are saying ignore what is in the textbook, my preferred sub-category of  market failure (externality) will be name for all market failures, because externality like all market failures results in allocation that is not efficient. I find that unnecessarily confusing, we already have the name market failure. I personally don't like when people willy-nilly rename things that already have name for no good reason.  
> **username_4**: @username_5 If you read my answer, you'll see that this is not at all what I am saying! [In fact, I don't even care how you define externality... if you read the answer, you'll see this is not an important point. What matters is understanding if the *logic* of the standard externality argument applies here or not.]  
> **username_5**: @username_4 I am sorry but this is what I read in your answer. Maybe it is not what you wanted to say and I don't understand you or you did not sufficiently explained what you mean. Also if you think my comment does not make sense ignore it. I just wanted to point out that market power is not externality for you or someone else who might read this. That's all.  
> **username_4**: @username_5 My answer does not even mention market power. Please do read the answer to see if you find it persuasive (and let me know if I have missed anything).  
> **username_5**: @username_4 sorry, I meant comment, I think of all of this as part of an answer  
> **username_6**: @username_4 The difference is that if I take the bus, I pay a ticket. Whereas if I drive more on the road, I'm not paying for this extra use of the road. There is a market for bus tickets, so this is not an externality. There is no market for buying "use of road tickets" so this generates a potential externality.  
> **username_4**: @username_6 Agree, that's a good point. But I don't see why market prices need to be optimal here (e.g. imagine if they price at marginal cost, as in my answer). So even if it's private, I think that you can get too many taking the bus -- for exactly the reason why negative externalities lead to overproduction in general. [I think this depends on a bit on the market structure, so this is a delicate issue... Unlike perfect competition, I think a market monopolist would actually choose the price that leads to the efficient allocation.]  
> **username_6**: @username_4 If demand exceeds supply for bus seats, then prices should go up. Then you can ask the questions why there are no seats available on the bus for everyone willing to buy a ticket: maybe there is monopoly power, or maybe there are barriers to entry in the bus industry. Whatever market failure is present here, I think this is another question that is not really related to a congestion externality.  
> **username_5**: @username_4 by the way, this is another problem externalities exist not when firms price things at marginal costs, but when marginal private costs do not include marginal social cost ($MC \neq MSC$) in equilibrium without externality market price will occur at point where marginal cost equals marginal benefit (or marginal utility) $MC=MB$ and where $MC=MSC$ and $MB=MSB$. If $MSC>MC$ we have negative externality. If $MSB>MB$ we have positive externality.  
> **username_4**: @username_6 I wasn't really thinking of a capacity constraint. Rather, I was imagining that it is *unpleasant* if many take the bus (e.g. because you need to stand up). Under Bertrand competition with constant marginal costs, I don't see how this externality is factored into the price. However, under other market structures, it may be.  
> **username_4**: Though I guess if marginal costs are constant, you shouldn't really get congestion... As I say, I think this is a delicate issue (and I'm open to the idea that I'm wrong about this!)  

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