Economic Rationale for Road Pricing - Essay Example

? “The economic rationale for road pricing is compelling”, Institute for Fiscal Studies, May Critically discuss this ment. Contents Introduction 3 Road Transport and economics 3 The report 4 Conclusion 6 References 8 Introduction The pricing of roads is often cited as the mechanism in order to manage demand in the theoretical literature starting from Pigou in the year 1920. Many articles took into account the compelling case for the utilization of the mechanism as management for congestion as well as optimize congestion along with network investment. After 1990s, the countries began to implement the schemes of road charging. The European Union is studying the marginal cost of pricing in the arena of transportation for about a decade now. The Union funded many ongoing projects in this field. The RAC Foundation handed over the responsibility of determining the mechanisms of motoring taxes to the independent institute of fiscal studies. They were asked to investigate whether the taxes are equitable and justifiable. The report from the institution mentioned the issue of cabotage and stated that the hauliers belonging to the other countries have the potential to deliver goods into the market of UK by paying lower taxes on diesel or ignoring the duty rates of the country (Gillen, 2007, p. 1-2). Road Transport and economics A key role is played by transportation in the economic scenario of today. A term, transport economics is used now to identify the role of transport in economy. The supply is determined by the capacity carriers offer to the travelers while the demand is determined by the number of trips the travelers takes within a particular time frame. In order to witness a booming economy it is necessary to maintain a steady system of transport that allows fluent access of goods and services across the country. If the goods get delay because of lacks in transport facilities the profits will fall which will take its toll on the level of efficiency. An efficient transport system will create employment opportunities (Croner, 2012). A vast majority of labor is necessary to carry out the responsibilities of transporting goods to the various places quickly. When the economy is not on its course people are less willing to travel and the economy suffers while in the booming situation frequent traveling not only creates more job opportunities but also contributes in strengthening the transport system. The road transportation is more popular where people tend to find the less costly method of transportation. The road transportation facilities are characterized by monopolistic competition which revolves around the conditions of supply and demand. The products or the services offered in the monopolistic competitive market are same but cannot be substituted. The differentiation in the offered products provides choices for the consumers and the consumers can take the decision on which product they want to avail. This factor acts as the catalysts to drive in more competition into the market as well as new innovations which are less costly and more effective (Seely, 2012, p. 2) The report The report of the IFS recommended a move to a more diverged system of road pricing. The revenues raised as a resultant can be used to reduce the taxes on motor transport. Such a measure is thought to generate sufficient economic gains from reduction in congestion. The measure is also thought to reduce the levied taxes on the majority of driven miles, and leave a certain portion of the motorists in a better off situation as well as provide a stable footing for the taxes on motoring without taking any additional measures to raise the net additional benefits from the drivers. The use of roads generates costs that are borne not only by the motorists but also by the wider society. Therefore externalities are accrued to the system of road taxes or the system of road pricing. These externalities suggest that in the absence of effective pricing or taxation policies there is inefficient high level of road use. The taxes have the potential to bring the level of private demands to match the demand that is desirable from the point of view of the society. Several other externalities are associated as well. The emissions of carbon from the burning of the motor fuels can be addressed through duties on fuel. These costs entirely depend on the usage of the fuels. The costs of accidents and noise depend where the driver is driving the car. Driving in the rural areas involve almost no costs of congestion. The taxes levied on fuel cannot vary with time and so lacks the potential to take into account these types of factors. The taxes on the usage of roads will be able to take these factors into consideration. There are large efficiency gains from the better targeted taxes. (Institute of Fiscal Studies, 2012). The above figure shows the estimate of the marginal external cost that is associated with usage of roads on each kilometer from the less costly depicted on the left to the most costly ones depicted on the right. It can be seen from the figure that the variation is large enough extending from 0.9p to 245p per kilometer. If a car of average efficiency is taken under consideration, a driving of a kilometer will lead to fuel duty of 5.5p if the location and time is ignored. Therefore, the flaws in the duty of fuel are clear. If the other duties on fuel are ignored, it can be stated that taxes are high on driving half kilometers, while the taxes are appropriate and little for driving one quarter kilometer. One can also state a fiscal argument to the pricing of roads. The revenues earned on the duties of fuel as well as the duties of excise duties do not seem to sustain in the medium term. According to the forecasts from the concerned authorities, it is estimated that the revenues from the taxes will be lower than the current level of national income by around 0.9%. The decline can be partly accounted to the rise of the efficient vehicles and the growth of the electric vehicles. In cases where all vehicles can be operated through electric the revenues from taxes on fuel and from excise duties on fuel would disappear totally but the problems relating to congestion would still be prevalent. Now the question which arises is how to replace the loss in revenue. It has been estimated that the amount lost is equivalent to 3.5 percentage rise in the basic rate of income tax or a rise of 50% in the prevailing rates of the duties on fuel (Channel 4 news, 2012). The options make little sense as the number of motorists depending on conventional fuel is on the verge to decline. There is also lack in consistency in the procedures of sustaining proceeds through further rises in the fuel duties. The present government as well as the predecessors took the step but failed to implement. It appears that the usage of roads would form a more sustainable tax base. It has been estimated that the total distance driven by the motorists in UK would rise by almost one quarter in 2030 from the travelled distance calculated for the year 2010 (Guardian Business Blog, 2012). The revenues accrued from the pricing of roads would not be eliminated however it has been assumed that the revenues will vary according to the location or the time of driving. The vehicles will only become far more efficient as of now and will provide the right signals in order to deal with the variation in the costs of congestion (Skynews, 2012). Conclusion It can be argued that there are various long term pressures on the spending as well as on the taxes. Therefore it is the time for a more stable system of road pricing. The design of the pricing of roads and the demographic changes should also be considered in the debate. The potential reforms laid down by the Prime Minister ranging from ownership to the network of strategies enhance the need for responsible and sensible joint venture of strategies. It is the duty of the government to analyze carefully whether the signing of deals that would led the private ventures to manage the key roads will lead to compromise of the ability to introduce the pricing of national roads. The Smeed Report suggested as many as 12 designs on road pricing. The report included that the taxes should be in line with road usage, the prices shall vary according to area and time, stable prices should prevail in the system, fair incidence of the system on the road users, the method should be easy so that it is understandable by all, the equipments used in the method of calculating taxes or in the system of road pricing should posses a high degree of reliability, the system should be free from fraud and should also be stringent so that none can evade the tax base, the regime of the system should be wide so as to include wider vehicles under consideration , flexible system for the occasional users, system designed to protect the privacy of the individuals and the validity of the levied charges, system should facilitate integration with other technologies. References Institute of Fiscal Studies, 2012. “The road ahead for motoring taxes?”. [online]. Available at: http://www.ifs.org.uk/publications/6174. [Accessed: 14th August, 2012]. Gillen, D. 2007. “The Role of Intelligent Transportation Systems (ITS) in Implementing Road Pricing for Congestion Management”. [Pdf]. Available at: http://www.sauder.ubc.ca/Faculty/Research_Centres/Centre_for_Transportation_Studies/~/media/Files/Faculty%20Research/OPLOG%20Division/OPLOG%20Publications/GILLEN/Gillen%20-%20Road%20Pricing.ashx. [Accessed: 14th August, 2012]. Croner, 2012. “Compelling case argued for UK road charging”. [online]. Available at: http://www.croner-i.croner.co.uk/croner-i/gateway.dll/ctaa-news/ctaa-recent-news/ctaa-16-05-2012-0901487080292d2b?f=templates$fn=ctaa-frameset.htm$3.0. [Accessed: 14th August, 2012]. Skynews, 2012. “Fears Tax Shortfall May Lead To Road Tolls”. [online]. Available at: http://web.orange.co.uk/article/news/fears_tax_shortfall_may_lead_to_road_tolls. [Accessed: 14th August, 2012]. Channel 4 news, 2012. “Motoring Taxes: a future headache for the Chancellor”. [online]. Available at: http://www.channel4.com/news/motoring-taxes-a-future-headache-for-the-chancellor. [Accessed: 14th August, 2012]. Guardian Business Blog, 2012. “Who's going to pay to update Britain's infrastructure?”. [online]. Available at: http://www.guardian.co.uk/business/blog/2012/may/15/who-pay-update-britain-infrastructure. [Accessed: 14th August, 2012]. Seely, A. 2012. “Taxation of road fuels”. [Pdf]. Available at: http://www.google.co.in/url?sa=t&rct=j&q=&esrc=s&source=web&cd=10&ved=0CFoQFjAJ&url=http%3A%2F%2Fwww.parliament.uk%2Fbriefing-papers%2FSN00824.pdf&ei=adEpUIaWJ4m0rAfh6oCICg&usg=AFQjCNEMXEOCPZYzy5YQ3vjDXWnk0GUb6g. [Accessed: 14th August, 2012]. Read More