Why traffic congestion is a classic example of the problem of externalities - Essay Example

 Road Pricing 1. Explain why traffic congestion is a classic example of the problem of externalities. Traffic congestion is the most significant problem in a large number of cities of the world. Traffic congestion is regarded as an example of consumption externality. It is reported by the experts that negative externalities do take place when consumption or production of a good or service by one person imposes a burden of cost on the other people. The result which is achieved from such a scenario does damage the environment. Traffic Congestion produces negative externalities. Various external costs are imposed upon by journeys through cars in the forms of air pollution, traffic congestion, noise pollution, change in climate and accident. Peaking is responsible for creating traffic congestion. Suppose that a road network is already running at its full capacity. At this kind of situation, if an additional car joins the network, then it is quite evident that it would result in the fall of average speed of all the cars in that road network that in turn would increase time of journey for all. Beyond the full road capacity, the cost that a journey through a private car has to bear gets increased due to congestion as it creates more delays in time as well as larger costs of fuel. If an individual takes the decision to drive his/her car at the time of going to work, the ability of the decision actually makes the same road a bit more crowded. However, the capacity of the decision of an individual driver to drive is actually quite small in making delays for other vehicles on the roads, but if the number of private commuters increases significantly, the problem of congestion would surely become more troublesome. (Litman, 2003; Lindsey, 2006) If one has taken the decision to carry out the journey by his/her own car, this produces some impacts on other travelers on the road in a significant manner. This is surely the example of negative externality caused by traffic congestion and as with some other events of externalities all the economists do try for placing some monetary value on some negative external effects of traffic congestion in the following way: (Litman, 2003; Lindsey, 2006) The costs of perceived delays in journeys due to congestion are valued with the help of the gross wage rate. All the additional costs are taken into account, such as extra costs of fuel. Negative externalities are always considered by the economists as undesirable because they help in creating inefficiencies. It simply implies that people indulge in driving even if they should not do so from a societal perspective. For instance, if one estimates that all the benefits of going for a drive including more comfort and more flexible journey surpass the costs of driving in the form of fuel costs and costs of maintenance, then the person would choose driving through personal car as the best mean for going out to work. But, in this calculation, the person has surely neglected some vital component: the costs for longer period which the person would impose on other commuters inadvertently. Thus traffic congestion becomes a classic example of the problem of externality. (Litman, 2003; Lindsey, 2006) 2. Consider the ways in which private motorists will respond to road charges and comment on the private motorists' price elasticity of demand for road use. According to the theory of demand, an increase in price of a normal good/service will cause a fall in the quantity demanded for that good. This logic holds true for the road use by private cars as well. Imposition of road charges implies that costs of road use will increase for private motorists. Given the same benefits derived from going out with a private car, road charges cause the average costs to rise. It will simply result in a fall in the road use by private motorists. They would now prefer to go with a bus or travel in some other time when congestion is lower. Thus the private motorists respond to a road pricing either by reducing the same road usage at peak load timing or by choosing other less congested routes. (Lindsey, 2006) As far as price elasticity of demand of private motorists for road use is concerned, from a theoratical perspective and common sense, it can be said that demand for road use will be inelastic for private motorists in the sense that the percentage change in the demand for road usage will be less than the percentage change in road pricing. This implies that during peak load hours congestions will not be reduced more than proportionately in relation to proportionate change in road price. This is because the extra costs of using roads at the event of road charge imposition falls in a disproportionate way on the employer than the employee. As a result, the office passengers are in great hurry to reach their office in time. Thus during office hours the value of reaching office in time to many private motorists becomes larger than value of increased costs of road usage. Thus the price elasticity becomes less than one. (Lindsey, 2006) 3. Using supply and demand diagrams analyze and explain the impact of road pricing on: A) The market for petrol. B) The market for bus journeys. A) From a theoratical perspective and common sense, it can well be expected that the increase in road pricing will lead to a fall in the consumption of fuel as private motorists will reduce their road usage on account of increased costs of usage. As the private motorists reduces road uasage on account of road pricing, the deamnd for fuel will also fall no matter whether fuel price has increased or not. Given that supply of fuel does not change at a given fuel price, demand will fall in the fuel market. In order to maintain equilibrium in the market of fuel price will adjust and become lower than its previous level. This can be analysed through the following diagram: P (Price) S P1 E1 P2 E2 D1 D2 Q (quantity) Q2 Q1 Figure 1 Figure 1 describes the market of fuel under road pricing. D1 and S1 represent the demand and supply curve of fuel consumption before any change in road pricing. E1 represents the initial equilibrium condition in fuel market with P1 equilibrium price and Q1 equilibrium quantity. Now with an incarese in road pricing demand for fuel falls and demand curve shifts down to D2. In this changed scenario, equilibrium point becomes E2 and equilibrium price becomes P2 that is less than P1 and equilibrium quantity becomes Q2 that is less than Q1. (Kain, 1994; Hardy, 2009) B. Increase in road pricing will cause an increase in journeys through buses as people will become less likely to travel with their private vehicles. As cost of private commute increases with increase in road pricing, more people will try to avoid journey through private cars and they will try to avail mass transport system like buses, trains etc. Thus demnd for bus service will inacrease. Given other things constant, it may lead the bus operators to inacrese the value of tickets for journey through buses. The following diagram explains it. P (Price) S P2 E2 P1 E1 D2 D1 Q1 Q2 Q (Quantity) Figure 2 Figure 2 describes the market of fuel under road pricing. D1 and S1 represent the demand and supply curve of bus services before any change in road pricing. E1 represents the initial equilibrium condition in marketof bus journey with P1 equilibrium price and Q1 equilibrium quantity. Now with an increase in road pricing demand for bus jouney increases and deamnd curve shifts up to D2. In this changed scenario, equilibrium point becomes E2 and equilibruim price becomes P2 that is greater than P1 and equilibrium quantity becomes Q2 that is higher than Q1. (Kain, 1994; Hardy, 2009) 4. Outline the advantages and disadvantages of charging motorists depending on when they travel and which roads they use. Charging motorists depending on when they travel, i.e. time-based tolling, for the specified individual road lanes or road can be charged for congestion on the major highways and shall improve upon the traffic which flows on the facility which already exists. Its advantages are as follows: This system is very effective in generating revenues to the government. It is one of the most effective tolling systems for reducing congestion. It effectively reduces pollution. The disadvantage of this system is that it is not very competent in increasing safety during road usage. Charging motorists depending on which road they use, i.e. cordon pricing, has the following advantages and disadvantages. Advantages are as follows: It is competent in generating revenues. It is one of the best methods for reducing congestion. Disadvantages are as follows: It is one of the worst methods in reducing pollution. It is not very competent in increasing safety. (Holguin-Veras, Cetin and Xia, 2006) References: 1. Litman, T. (2003), London Congestion Pricing: Implications for Other Cities, Victoria Transport Policy. Available at www.vtpi.org/london.pdf (accessed on 30th May, 2011) 2. Lindsey, R. (2006), “Do Economists Reach A Conclusion on Road Pricing? The Intellectual History of an Idea,” Econ Journal Watch: Scholarly Comments on Academic Economics, 3(2): 292-379. 3. Kain, J. (1994), “Impacts of Congestion Pricing on Transit and Carpool Demand and Supply,” Curbing Gridlock, Vol. 2, Transportation Research Board. Available at www.trb.org ( accessed on 30th May, 2011).   4. Holguin-Veras, J., Cetin, M. and Xia, S. (2006), “A Comparative Analysis of US Toll Policy,” Transportation Research A, 40(10): 852-871. 5. Hardy, M. H. (2009), “Transit Response to Congestion Pricing Opportunities: Policy and Practice in the U.S.” Journal of Public Transportation, 12(3): 61-78. Read More