This chapter seeks to explain the existence of market failure i n the case of road transport and to justify the need for government intervention. In so d o i n g it introduces a lot of economic terminology. Understanding this terminology is essential for what follows. There are many currently engaged i n the transport debate who are inclined to use economic arguments to support their point of v i e w as to which direction policy should take. But economics is a rigorous subject and some words and phrases i n everyday parlance have completely different meanings i n economics. It is important to be clear about what these meanings are i n order to avoid confusion and the drawing of erroneous policy conclusions which are not supported by economic theory. A prime example of this occurring is the assertion that congestion costs are 'internal costs' rather than external and that, for the purposes of determining the appropriate level of taxes on road transport, they can be ruled out of court. A second example is the view that 'because road transport has so many external benefits these must balance the environmental costs'. This chapter explains w h y both of these commonly heard statements are plain wrong.