With respect to a proposal to raise the federal transpor tation fuel tax by $1.00 (presumably per barrel), as an econo mist for the National League of Cities, I would recommend that the organization oppose the proposal. The grounds for opposi tion would be that the effects of such a tax increase would impose significant hardships on urban areas, and that it would be just one more example of actions effected at the federal level of government in an attempt to solve problems created at that level, without any consideration for the impact on other levels of government of such actions.
The proposed increase in the federal transportation fuel tax would create the greatest impact on urban areas through the creation of negative externalities (Levy, 1985, 276). In lay language, externalities may be described as side effects and fringe benefits. Positive externalities may be viewed as fringe benefits, while negative externalities may be viewed as side effects. Externalities are also referred to as spillover effects, external effects, and social effects. All such terms refer, essentially, to the same phenomenon.
In economics, an externality exists when an activity by one or more parties affects, for good or for bad, another one or more parties who are not a part of, or are external to, the activity. The essence of this concept is that economic exter nalities are created when private costs or benefits fail to equal social costs or benefits. The consequences of any
externalities thus created are economic inefficiencies. Within the context of welfare economics, economic efficiency requires that it must not be possible to change an existing resource allocation in such a way that someone is made better off and no one is made worse off.
In recent years, the concept of economic externalities has, more often than not, been applied to activities involving some sort of adverse environmental impact, such as smoke from a fact...