Question

In 2003, London established a congestion charge for cars and vehicles entering the central London area. Today, motorists entering the charge zone area pay a flat rate of £11.50 (around $22AUD), debited through a scanner. Failure to pay the charge results in a penalty of £130. Currently, electric cars and some low-emmission hybrids receive free entry to the zone. Net revenue from the charge is used to invest in public transport, improved roads and bridges, and create walking and cycling paths. What economic problem (or problems) do you think the congestion charge is trying to solve? Explain how the congestion charge might help to solve these problems.

B)After the charge was introduced, the number of vehicles entering the zone fell by about one-third, riders on buses increased by 15%, and bicycle use increased by 30%. Using principles of microeconomics, what explanations can you give for these changes in the behaviour of drivers?

C)Suppose the charge is increased by 15%, and revenue from the charge scheme increases by 20%. Explain why revenue has increased at a faster rate than price in this case

Answer 1

Economic problem of extensive pollution, which leads to increase in health expenditure, is what the congestion charge is trying to solve. Essentially economic problem of negative externality which arises because of cars generating too much pollution in the city.

By imposing a congestion charge, it will prove expensive for private vehicle owners to enter London as they will be charged, this will reduce the number of private cars who will crowd in the roads and people will instead prefer traveling by public transport, thus because of the congestion charge, there will be less number of vehicles and this will reduce the pollution level in the city.

B) According to the principles of microeconomics, the higher the price, demand reduces. Thus because of the imposition of the congestion charge, less number of people travel by cars. Plus one can apply the concept of scarcity and choice, as there are ample options available to travel instead of by car, consumers get the benefit of choice and reduce car usage. For example if there were no options available then, consumers would have opted to travel by car. They also opt to buy electronic cars as there is no charge in that case.

C) Charge increased by 15% and revenue from the charge increased by 20%. Thus revenue has increased at a faster pace, because the demand might be inelastic. Wherein even if the price increases, the demand for driving by cars doesn't fall and people are able to afford the charge, or have no other alternative to travel conveniently.