Discuss the merits of road pricing

L1. Road Pricing - a direct charge for the use of road space Negative externality - these exists where social costs of an activity is greater than the private cost, congestion is an example of a negative externality L2. For example, The London Congestion Charge - a flat rate indirect tax levied on all vehicles entering a designated charging zone between 7 am & 6 pm, Monday-Friday. It was introduced in Feb 2003 at the rate of i?? 5 per day. It was ? to i?? 8 per day in July 2005.

In Feb 2007, the charging zone was doubled in size to cover a substantial zone in London. This is an example of hypothecation (a situation where revenue from tax is directly allocated to some other purpose) as most of the new revenue has been used to improve bus services Another example of road pricing is in Singapore you must buy a car permit for 10 years, which costs up to i?? 75,000. L3. Road Pricing is beneficial to an economy as it is a way of internalising the external costs of congestion and makes the polluter pay.

The fact that the 'polluter' now has to pay for the negative externalities exerted by the congestion they cause, means that they will be less likely to use their cars as often, to avoid the charge, or use alternative (more economical) means of transport such as the train or tube, or they may simply think twice about using their car if it isn't necessary. The London congestion charge has, for example meant that congestion in the extended zone has decreased by 20% and there are 8-12% less vehicles being used on a daily basis that before the charge.

Showing that road pricing has decreased congestion. The hypothecation of road pricing has meant that the i?? 120 million raised per year can be spent on improving public transport services. This means that, as these more environmentally friendly methods of transportation are improved, people will be more willing to use them as an alternative to cars, meaning a further reduction in congestion, and thus a reduction in the harmful emissions the economy produce. Meaning there are less negative externalities in the form of pollution being exerted by the economy.

Less pollution means a decrease in money the government have to spend through the NHS on diseases that are caused by pollution from car emissions, such as asthma, lung disease lung cancer etc. The reduction in congestion will mean a decrease negative externalities in the form of: > Wasted fuel - fuel is an extremely finite resource, in every single economy, the reduction in congestion means less fuel is wasted waiting in traffic jams. If people have to spend less on fuel they will have more disposable income to spend on other things such as leisure and shopping.

This will boost demand in the economy. Causing the Demand curve to shift to the right, meaning a in unemployment, an in output, productivity &  economic growth Wasted time - as people have to sit in traffic jams, which is very unproductive. Instead of sat in cars people could be working or relaxing. The time wasted in traffic jams could also mean they are late for work. This will not only mean that they are less efficient as they have less time to spend working but it also means that they could get sacked for being constantly late.

This may mean that an economy's unemployment rate ? s and their output and productivity decreases. Thus economic growth ?. > Increased Stress - traffic makes people stressed, which means that their standard of living ? , it also means there is an increase in suicide and divorce. It also means they are less efficient when at work, which may cause them to get sacked. Meaning as before, an economy's unemployment rate ? s and their output and productivity decreases. Thus economic growth ?.

Without road pricing these negative externalities would exist, as an innocent third party is paying for the negative externalities, and social costs>private costs. Shown on the diagram below. This means the market is functioning at point X, where Price of congestion is P and the quantity of congestion produced is Q. Thus there is an overconsumption & overproduction of consumers not paying the full cost of their negative externalities thus allocative inefficiency exists, the market is failing. A welfare triangle loss of YXZ occurs.

The welfare of consumers could be increased by this amount if output of congestion is lowered and the resources saved my doing this are put to better use. E. g. hypothecation by funding the public transport with revenue from road pricing. To correct this market failure the road pricing is introduced, the equilibrium should be at point Y, where allocative efficiency is achieved, as price is now = to marginal social costs. By at producing Y, the price paid increases to P1 and the quantity produced falls to Q1.

Private costs now = social costs. The polluter now pays and the externality has been internalised. If congestion decreased due to road pricing, it means that there is less damage done to the roads as less people are wearing them down in traffic jams, causing damage by going too fast when they are late for work due to congestion and less crashes happen as people are less stressed and no longer have to wait in traffic jams so may not have to speed to get to work.

This means less revenue needs to be spent on crashes, accidents, on average costs the government in 1999 i?? 3billion. It also means that less government revenue needs to be spent on repairing the damaged roads. This means that the opportunity cost the government faced previously of having to spend more on road maintenance and crashes, can now be spent on more beneficial things, such as playgrounds & youthclubs.

Another benefit from road pricing is that it generates more revenue for the government, meaning that not only can that revenue (e. g. i?? 120million a year from the London Congestion Charge) be hypothecated and spent on improving public transport, some of it can also be used to improve other parts of the economy e. g. education services and healthcare. Road pricing will create employment for the economy, e. g. people will need to be employed to set up the payment methods, e. g. toll booths or electronic tagging systems. Jobs to man the booths will also be needed and jobs to maintain these methods will also be necessary.

This employment will mean the economy has higher employment rates and more disposable income, boosting demand in the economy. L4. HOWEVER, road pricing has its limitations, roads are meant to be a public good which are consumed collectively, it is difficult to charge for them so they should be financed by the government. So it is unfair to charge for a good that was once and is supposed to be free. Also, as they are a regressive way of charging it means that road pricing will hit the poor hard, this raises equity issues.

Although a proportion of the money from the London Congestion Charge is hypothecated, it depends on what the money is spent on, both the hypothecated money AND the money that isn't spent on investment in the public transport. For example the revenue could be spent on giving the owners of the bus services big bonuses, not actually improving the service they provide. The effectiveness of the road pricing depends on whether the public accepts the road pricing, it will not be effective if the public do not accept that they need to pay for the cost.

For them to realise, they need the provision of information about the road pricing so they actually know it exists, including exact charges, times they will be charged and the consequences of not paying. On this note, there must be consequences of not paying for the road charges. For example a fine, the amount of the fine will be hard to calculate, as it cannot be too high that people simply cannot afford it, but cannot be so low that people don't care that they have a fine as it is only something so little.

It must also be a fine that is substantial to the rich & poor, but still affordable by the rich. It will cost a lot to monitor that the road prices are actually being paid, this may be in the form of traffic control, policing schemes such as electronic charging systems used in Singapore, tagging such as the ones used in Bergen and Oslo (where cars are tagged and charged when entering certain zones or toll booths. It will also cost a great deal to monitor that any consequences for not paying the road charge, e. g. people will need to be employed to write and send letters to those who haven't paid.

This means there will be an opportunity cost in the form that the money spent on these schemes, the monitoring of these schemes and the employment needed to control these schemes could be spent elsewhere, e. g. more subsidies could be given to infant industries. These schemes will only reduce congestion to a certain extent, it will not be completely eliminated as private vehicles have an extremely inelastic demand because they give the road user flexibility and they are therefore willing to pay a high price to use them, and for an inelastic good, increasing the price is usually not the best solution.

Other alternatives need to be thought of to reduce congestion, e. g. adverts telling the road users the damage they are doing to the planet, raising the driving age or making driving tests harder may be a more effective idea.

These will also cost the government time and money It depends on the size of the charge, for example if it is very little people will not be bothered and congestion levels will not change. It also depends on the size of the fine that they must pay, if it is very little, e. g. 50p they wont be bothered to pay. It also depends on the duration of the charge, if for example it lasts one or two months, it will not have a significant effect on congestion levels in the long run, but just for those periods of time, meaning the change is not sustainable It depends where the zones are that use the charge, if it is a very small area in the countryside, where they never had any congestion in the first place, it will have no effect.

The zone must also be a place that cannot be avoided, as if road users can avoid the zone, the congestion will just move to those roads. It is very hard to determine the areas where the congestion charge is most needed, as congestion is very hard to measure. C -To conclude, congestion charging is more beneficial than not, as it can control congestion in heavily congested areas and encourage the use of more environmental methods such as public transport and raise government revenue at the same time. The benefits outweigh the drawbacks