chapter  13
The Postwar Literature on Externalities: An Interpretative Essay
Pages 21

As for the other issue, congestion on the roads, the Pigou explanation [42, 1946] , reduced to its elements, is that each of the owners of the vehicles operating on a stretch of highway would have regard to the costs incurred only as it affected his own vehicles; each owner, that is, would ignore the costs simultaneously imposed on all the other vehicles by the addition of his vehicles. In order, then, to take account of these external diseconomies suffered by the intra-marginal vehicles Pigou constructed a curve that is marginal to the per-vehicle average cost curve, optimal traffic being reached when this marginal cost curve is equal to price, or marginal benefit. This optimal traffic flow can be attained by levying a toll on all vehicles equal to the difference, at the optimal flow, between the average and the marginal cost.