Tuesday 13 October 2009

Such a road pricing scheme when drivers have to pay per mile have many benefits in terms of reducing negative externalities, however there are some arguements against this policy.

There are many external costs arising from the use of private cars such air pollutions, traffic jams and time wasted in traffic jams, decrease in efficiency and loss of time; in order to cope with all these problems government as one of the solutions might introduce charging scheme and this will be an effective way since there 'pay as you go' principle will work and every driver will pay as much as he has driven and so this would be more equitable. However, on the other hand, the question of equity will still arise, because people from different backgrounds will have to pay the same amount and thereby there regressive taxation system will work since the poor will spend a bigger proportion of their income on it.
Another advantage of this charging scheme is that it might be really helpful in reducing congestions on major roads and thereby reduce negative externalities. But the problem for the government is the amount of tax that has to be charged per mile.
As you can see from the graph below there wasn’t any market failure before the line started to diverge.



This occurs because volume of cars reached the point when negative externalities appear. Market equilibrium will be at point B, while social equilibrium where external effect is internalized is at point C. If government introduces prices which covers all the costs from congestions, volume of traffic will fall from Q to Q1 and price will increase from P to P1; the net social gain from saved congestion costs is shown by triangle ABC. However, since it is almost impossible to calculate exact price for all the costs, it would be very difficult to achieve such situation.
Another problem with this charging scheme is that instead congestions on smaller roads might appear where drivers have to pay fewer taxes and as these small roads usually increase journey, more time will be lost and more delays might occur.
Moreover, there is an ethical issue about the scheme of having electronic tags in each car since every car will be under control by government which can spy all your journeys. (Big Brother problem)

1 comment:

chris sivewright said...

Again you are the ONLY Economics student doing this!