The Freeway Game helps students understand negative externalities and develop ways of at least partially neutralizing their undesirable effects. A toll can be used to internalize the traffic externality and eliminate the congestion. As a result, it takes too long for people to commute. In the Freeway Game, a traffic externality causes congestion on the freeway. When a decision maker does not account for all the costs or benefits associated with a decision, there exists what economists call an 'externality.' Externalities are commonplace, and can cause significant problems (or create significant benefits) for firms and society. When deciding whether to get on the freeway during rush hour, did you ever stop to consider that if you did so, you would slow everybody ELSE down? When we ask our students that question, they typically laugh-their only consideration is how long their own trip will take.
In the game, traffic congestion is simulated to demonstrate the effect of a negative externality.
Understanding this concept is important because when externalities are present, the outcome of free markets may lead to situations that are socially undesirable (e.g., too much pollution or not enough private investment in education and research). The Freeway Game was created to help students come to grips with the concept of 'externality'.
