Question

(a) 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

ANSWER:

a) As there is a economic problem of extensive pollution, it will leads to an increase in the health expenditure, it is what the congestion charge is trying to solve. And also necessary economic problem of negative externality arises due to the cars that are generating so much of pollution in the city. And also by charging a congestion charges, it will prove costlier for private vehicle owners to enter london as they will be charged, this will decrease the number of private cars who will crowd on the roads and also people will prefer travelling through the public transport, because of this congestion charge there will be a less number of vehicles and this will reduce the pollution level in the city.

b) As per the norms or principles of microeconomics, more is the price- less will be the demand. Thus due to the imposition of the congestion charge, less number of people will be travelled by cars. Also one can apply the concept of scarcity and choice, as there are ample options available to travel instead of by the car, customers will get the benefit of choice and decrease the car usage. For instance, if there are no options available then the consumers would have opted to travel through car. Few people also try to choose to buy the electronic cars as there is no charge in that case.

c) As charge gets increased by 15% and also revenue from the charge is increased by 20%. Therefore the revenue has increased at a faster pace, due to the demand might be inelastic. Wherein even if the price increases, the demand for driving by cars doesn't fall and also people are capable to buy at that charge or will have no other alternative to travel more freely.