For example, an upstream factory discharges effluent, which reduces fishing downstream. On the other hand, a beekeeper benefits neighboring farmers by incidentally supplying pollination services. The gist of these third-party or spillover effects, called externalities, is that their costs or benefits are not reflected in their prices. Thus, markets will supply too many of the goods with negative externalities and too few of those with positive externalities. To mitigate goods with negative externalities, they should be taxed, and to enhance those with positive externalities, they should be subsidized.
Congestion is a negative externality.
As additional people use a facility or service, the quality of service received by all users declines. Consider a fire station, a school, an airport or a sewage disposal plant. One extra consumer after a certain point is reached will dilute the quality of service provided to other consumers. Congestion amenable to pricing When drivers use a highway, they do not pay the costs that they may be imposing on other drivers. Ideally, traffic should flow smoothly at the speed limit.