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Economics of policy issues - Essay Example

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Externality of an economic transaction is an impact on a party that is not directly involved in the transaction. In such a case, prices do not reflect the full costs or benefits in production or consumption of a product or service. Externalities are often negative effects created by a party who has taken an action over those are not involved in this action…
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Economics of policy issues
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Economics of policy issues

Download file to see previous pages... As a result these traffic congestions occur more frequently as the trouble makers (those who do not follow the traffic rules) do not take into account the problems that others stuck in this jam would face. If they are aware of the fact that other people would suffer because of the jam that has been created due to their negligence, they would avoid doing it. Since then they will realize that gains such as (reaching the office or school) would be less as compared to the harmful effects of the jams such as accidents, tension, chaos and other problems that traffic jam creates.
Economists usually explain this theory using a diagram. This diagram says that if people are aware that they cause externalities with their action, they will do less of these actions which create externalities.
Suppose, that a person want to break a traffic rules for one reason or another. Before making the decision he'll only look at his external costs (such as fines, traffic tickets etc.) and his private benefits (such as reaching destination early etc). In such a case his private cost curve will also be his supply curve and his private benefits curve will be his demand curve. The equilibrium in this case will occur at point where demand is equal to supply or in other words where private costs are equal to private benefits. The equilibrium quantity when he'll only take his costs and benefits into account will be Q1.
However, if this person realizes that his actions are going to affect others as well. Then he'll take into account all the costs that he face and that other people are going to face as a consequence of his decisions. In this case, the supply curve will be above the private cost curve because it will be a sum of private and social costs. Equilibrium will be again at a point where demand = supply or where social costs are equal to private benefits. The quantity of traffic congestion will much less at Q1 when price is increased from q1 to q2.

From the above discussion it is proved when the road pricing is implemented, the prices for the road users will go up and hence less people are going to use the road which in turn is going to reduce traffic congestions and other road problems.

Therefore, governments use road pricing to limit the number of cars i.e. from q1 to q2 in (fig1) by increasing the price from p1 to p2.
As a result many governments adopted road pricing as a mean to curb this externality. The Road Pricing Charge was implemented in various countries with some success. The overall experiences were good but let's look at the individual experience of each country.
The most famous road charging scheme was implement in Singapore. A scheme was initially started in 1975 and was replaced by electronic toll collection in 1998. A device was fitted into the vehicles with prepaid cash cards being fitted into this device. As these cars pass through a charging zone, the amount was automatically deducted from their prepaid cash card. This amount varied with the time of the day and type of the vehicles. Commenting on the system the authority for transport affairs in Singapore once said that this prepaid system makes people more aware of the cost that they create for the society and those who create more costs pay more and indicated that system is flawless and efficient. And unlike London ...Download file to see next pagesRead More
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