In this case, you drink seven beers. You could have gotten an eighth, but its marginal value to you, since you're already very drunk, is less than ten cents. It's a rowdy evening, but as everyone prepares to stumble home responsibly, the bartender hands each person a bill for $70. You wonder how this is possible when each beer that you drank only cost you ten cents. It suddenly hits you that each beer that everyone else drank also cost you ten cents and, as it turns out, each of the 100 attendees drank seven beers apiece. As a result many more beers were drunk, and everyone was much worse off than if they had just paid for their beers themselves. That surplus of $39.95 that you thought you had is actually a loss of $29.35.

Unfortunately, it gets worse. Let’s say you realized as the night started that if everyone drank seven beers apiece, you would lose out big time, so you decide to drink only the two beers that would make you the happiest if everyone were paying separately. Regrettably, you are unable to convince others to do the same. So, by the end of the night, 695 beers have been consumed. Your two beers gave you a value of $28, but your bill of $69.50 means that you’ve suffered a loss of $41.50. This is actually worse for you than if you had consumed a full seven beers, but you did manage to save everyone else 50 cents. Maybe you should have just stayed home.

Breaking Down the Analogy

The analogy is, of course, that beers are like roads. Drivers log more miles and demand more highways than they would if they paid for such infrastructure directly. The way the system is set up incentivizes them to do so. To make this less complex, let’s reduce the number of attendees at the event down to just you and the host, but where you still split the bill at the end. The marginal value of each additional beer is the same as before, but the marginal cost to you is $5, since the $10 true cost is split between two people.