As can be seen in Figure 1, CO2 coming from motor gasoline and diesel fuel combustion contribute between 25
and 30 percent to the total emissions. To the extend these costs do not enter into drivers’ or passengers’ cost functions,
the chosen level of driving activity, as well as the amount of pollution produced per kilometer, may be above
the optimum. This is because the equality between the marginal utility from a driving the next journey with its marginal
costs obtains at a higher level of driving activity than would be justified by the marginal costs of that journey
born by the society as whole (assuming diminishing marginal utility from travel). This is a blueprint example of an
externality situation where an appropriate tax may correct the incentives. In a textbook notation we have inequality
between the private marginal costs