Economics of Policy Issues - Essay Example

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. Traffic Congestion Similarly is an Externality, those people because of who the traffic jam or traffic congestion is taken do not take into account the problems it has created for other car that has been stuck into the jam and only calculate or look at the problems they bear due to the jam. 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. It will be help us understand the negative externality better if we explain the above diagram. 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 charging there's no fixed price but each time a new amount is charged as soon as a vehicle enters a charging zone. Norway also started the scheme of road charging in their metropolitan city of Trondheim, Like Singapore road charging scheme there was no fixed but charges varied with the frequency of journeys into the charging zone. However, the government planned to end the scheme by 2005 but the success of the scheme was so much that public opinion turned in favor of the scheme and government was forced to keep this scheme in tact. Melbourne in Australia also introduced a scheme based on congestion Charging know as "City Link". The same system was followed there as was in Singapore where payments were deducted from the prepaid cards as vehicles enter the charging zone. The system raised huge revenues for the government but was unsuccessful because it diverted the rush and congestion on alternative routes. Similarly, impressed by the success of London charging scheme, UK government also proposed a charging scheme for the county of Durham. It was introduced in 2002 but on a smaller scale than in London. It operates only on one street which is a part of old city. The charge here is only 2 between 10: am to 4: pm. The clear objectives were defined for this scheme. The major aim was to reduce the traffic to half during rush hours. However, this scheme dropped the traffic to more than expected rate by 90% and revenues were significantly reduced for the government. Looking at all these schemes and their successes and failure one cannot say that cure of traffic congestion lies in these schemes. At some places like Singapore and Norway and London this scheme has been really successful and people who even had to pay for these schemes had supported this idea of levying a charge at traffic congestion. But at other like Australia and other parts of England like Durham the scheme has failed to make any impact on traffic congestion and failed miserably. So, the government should not levy traffic congestion charges by just looking at the problem in a particular area, but instead, like all good companies do, it should do extensive market research before formulating any scheme. For example at some places where traffic congestion charge would not resolve the problem other schemes like increasing import duties on cars, increasing the interest rate on leasing of cars and other levying other taxes would solve the problem. And also to make the scheme successful implementation of such scheme should have to be efficient as many countries resort to the use of technology to implement the scheme because if implementation is not proper then many cars would escape these charges and thus this scheme won't be successful at all. Apart from the taxes, people should also be made aware of the traffic congestion and its solutions by airing public service ads on TV and radio networks. This will educate the people about the causes of traffic congestion, problems created by traffic congestion and how these problems could be solved. Not only will this solve the problem but it would also save the people from taxes that they are supposed to pay to overcome the problem. Another good way of reducing the problem is to reduce the supply of cars on roads. This can be done by elevating interest rate on car financing, imposing a limit on number of cars that a bank can lease and to estimate and build infrastructure in accordance with quantity of cars that are coming out on roads. For example, if government predicts that each year Let's look at the road pricing data and policies used in UK and determine whether the plan has been successful or not. In 1960s, road pricing policy was introduced in the UK to get rid of the traffic congestion problem. It was proposed by a commission report more famously known as "Smeed Report". However, the road pricing was not implemented until 2002 and Durham was the first country to have a permanent Congestion charge. Since then many parts of UK including London has had a congestion charge in order to avoid the negative externalities of congestion ad discussed above. At the beginning, this road congestion charges in London were 5 but later they were raised to 8, which signifies that the plan was successful and it did reduce some road congestion. The charge was levied on all the registered traffic Vehicles and failure to pay this charge resulted in a fine of at least 50. Later, seeing the success of the scheme, this congestion charging system was expanded to other parts of the UK. Later a scheme like London congestion charge was proposed in Manchester. The main aim behind the scheme was to reduce the load of traffic on roads during rush hours of evening and morning when people are going to offices and later coming back from offices to homes. However, the charges used in the Manchester scheme were much smaller than the London congestion charges. As a matter of fact this subject, its pros and cons have been researched extensively and many economist policy makers in UK believe that a congestion tax should be levied on every vehicle in UK to solve the problems of traffic congestion. As a result of these researches, various plans were proposed, some of which are: In October 2005, the government proposed to use public-private sector partnership to implement a "piggy-backing" system of road pricing. The aim was to charge vehicle according to their use or in other words the system was based on "Pay-as-you-drive" (PAYD) principle. This was to charge vehicles more which are used more extensively and less to those which are used less. This means that a charge would be levied on a vehicle according the distance it travels, the time of the day it uses the road and the size of the car. Suppose a big car using a rush hour traveling on roads would be charged more than a small car. However, implementing such a scheme would be considered as unfair to rural motorist. Since, these people are already paying thousand of taxes in the form of petrol taxes, road taxes, vehicle taxes and now implementing this would mean they would have to pay further more which is not going to be beneficial for the economy and auto-maker rightly protested against such a scheme fearing a decline in demand for automobiles. Before that in June 2005, there was another proposal on road pricing by Transport secretary, Mr. Darling to introduce a scheme of road pricing. The idea was different but it hit the auto-makers badly and Mr. Darling didn't remain much darling after that. The idea was similar to the one that has already been discussed. This idea was also based on public-private sector partnership. The idea stated that, UK road department should use a private satellite to calculate the distance traveled by each vehicle and in turn determine the road congestion charges for each vehicle. He proposed price plans ranging from 2p on un-congested road and to charge 1.24 on the most-congested road. In 2007, there was an online petition against road charging on a much wider basis in the UK, The initiator of this petition was Peter Roberts. He was able to get 1.8 million signature in favour of his petition. Mr Roberts was promised that a poll would be conducted before arriving at a final decision and in this poll most of the people rejected road pricing. 1 This was a breif history of road-pricing in the UK. Now let's look at London road pricing scheme in detail. The plan began in 2003, with a flat-rate charge of 5 on the vechicle travelling on the roads that surround Central London. This charge was implement to curb the road and traffic congestion by charging the amount of externality directly to vehicle who create these externalities. As a sign of traffic congestion in Central London, recent survey show that average speed of Vehicles on the main road in Central London has dropped from 14 mph to around 9 mph. This cleary indicates that there has been hinderance in traffic flow due to traffic congestion and these cases present externalities which must be avoided by using road pricing to reduce the number of cars on road by charging them a flat-fee in the form of road pricing. According to a source that major traffic jams occur in Central London at around 7:30 am in the morning and then 6:30 pm in the evening. According to classic economic theory, road is a classic example of a public good or shared common resources. The feature of public good is that every one can have it for free and they do not have to necessarily pay for them. Similarly, those using the Central London road network has free access to the road. When they come out on road they only calculate their personal costs in form of petrol and do not include the cost of congestion in their calculation. Congestion is a cost since it slows down the flow of traffic and each vehicle now have less speed, so these people reach their destinations late. Another reason for introducing the road pricing is that in his elections, Ken LivingStone London's mayor in his manifest said that he's going to reduce the traffic congestion by 15% in the near future. He consulted many experts on what could be the best possible congestion charging scheme that would discourage unneccesary journeys. After he was elected the mayor, as a part of the costitution he was supposed to give a transport plan for the betterment of raods, traffic and people of London. His plan was: Any vehicle entering into the central London will have to pay 5. The charges included the area of 21 sq km with the right to enter and leave the area as many time as the holder likes. Same charges were levied for every vehicle. The residents of the area were given a discount of 90% on daily charges i.e they were liable to pay only few pennies. This worked in the following way. As soon as a car entered the charging zone it's number plate was read an electronic device and will be stored in the computer database. Then the vehcile number will compared with the list of people who have and if he had not paid his number will be supplied to the concerned authority, This authority will issue him a fine of 80. If he makes a prompt payment his charge will be reduced to 40. If he doesnot pay on time his charge can go up to 120. Those eligible to pay were around 150,000 people who used the road every day. These charges were only levied on private vehicles. Pulic vehicles were exempted from these charges so as various other kinds of groups. This scheme was developed as a result of ROCOL report which argued to use the modern technology in the charging system because it was considered that paper-based system could be too cumbersome and could not be error-free. As discussed in the beginning, traffic congestion is an externality and can only be reduced if people are made aware of the social costs which exceed their private costs. However, many organisations in UK have argued over the price that is being charged. They claim that it is not the appropiate charge and is much higher than social costs that a vechile inflicts. They also support the reduction of this charge. Similarly, many people have argued that there are errors in database technology which often leads to double charging and over charging. So, in both cases if this carelessness persist it would not solve the problem of congestion but would deter people from driving even if they can afford to pay these costs. The economics behind this will that due to double charging and over charging , demand would go down to zero. It has been forecaseted that this scheme is going to reduce the traffic volume in Central London and is going to increase the average speed of vechiles as well as it is going to bring the congestion level down. But this has not been proved because survey periods have been too short-around 2 months, where as to assess the actual effects of these charges can only be determined if the system is surveyed for six months. Therefore, one cannot comment on whether the system has been successful or is a failure But if we compare the results of two month surveys that has been carried out, initally the plan is a success as it has effectively reduced the traffic volume and has also increased the average speed of vehicles. The plan has also gained revenues for the government which are around 130 million. This money, now can be used for eliminating the externalities that congestion creates and furthermore this money could be used for other development programs like using this money in providing merit goods like education, this money can also be used to provide health care, to build more road network that will divert the traffic from central London. This money can also be used for other public welfare programs. If you assess this projects on the basis of cost-benefit analysis, there are various benefits that this scheme brings. The possible benefits of the scheme are time-saving for people, reduced number of accidents, reduced pollution due to less car use etc. The overall impact of these benefits will be 884 million which is way above the costs of implementing such scheme. As a result this project is considered as a feasable project by many experts who insist that the project is rightly implemented. Apart from public welfare programs, the money that was earned from road pricing has also been used for public bus network improvements, road safety plans, late-night public transport service and to increase the road routes so that traffic load on Central London reduces significantly. According to the empirical evidence of this scheme, Out of the sample size of 11000 odds people, 1148 were residents of Central London and 316 were non-residents. The total numbers of journeys this group undertook was 42692 out of which 11561 were Central London journeys. Out of these 11561 Central London journeys, 7381 were made during the congestion charges time. 2741 out these 7381 journey were made by cars, remaining 4641 were non-car journeys. Out of these 2471 made during congestion time, 1912 journey were made by people living outside central London and rest by people who were residents of Central London. Out of thoses people who were not living in Central London but made a journey to Central London during Congestion time, 38.6% went there to work , 11.5% for school and college, 29% for shopping , 14% for sports and other recreational activities, while reamining 6% went there on holiday or for other purposes. Whereas, as already discussed that most of the journeys made to central London during congestion charges time were non-car journey which were made by bus or other means of travel. Out of the remaining journeys around 66% people went to Central London by bus, 6% for schools or colleges, and 15% for shopping. This data is about non-resident who came to central London by non-car journeys. According to the data in table 5.2, these congestion charges have reduced the unnecessary journeys as most of the residents preffered to walk rather than using their cars. London charging scheme was basically designed to charge people living in M25 in London according to their road usage and in other words according to the proportion of road congestion they create. Under this scheme, different people were to be charged differently on the basis of their travel patterns, where they live, where they work, where their children go to school , size of their car , the numbers of households etc. However, as it comeout, the results of this scheme varied from one household to another on the basis of their travel pattern as somewere charged large bill whereas others remained unaffected by it. The plan was to calculate the road-pricing charge from one person to another was an unprecedented one and was based on the following factors: The tax was a progressive tax and hence was a fair one. By progressive tax, we mean that people with higher income will pay more tax than those with low income. The tax was progressive because it was the rich people who used the road more and hence their travel patterns were more expensive than poor people. Simlarly, the tax was also based on where people live, posh areas under this scheme were charged more and hence the tax was progressive. The final charges were made to the households according to a survey conducted in 1991, which was more famously known as London Area Transport Studies (LATS).This survey was a comprehensive research and covered all aspects of travel patterns of different houselholds according to their ethnicity, work and other factors influencing their patterns of travel. The survey also include the total number of hours, a household spends on a tax-free area in week. This survey was used to calculate how much a tax household must pay based on the above factors and then adjustments were made according to any variences and changes in his travel patterns during a week. The results of the survey also proved that this tax will be a progressive one i.e people with higher incone will pay more than those with lower income. The only way, I think this problem could be solved is by using the combination of techniques discussed above as one technique solely could not solve the problem itself alone. What the governments can is that they should use advertisement campaigns to make people aware about the problems that are created by congestion such as time wastage, accidents and stress. These could be informative campaigns that would encourage people to use cars only when necessary. At the same time government could use road pricing scheme to good effect. They can charge people who enter the charging zone as already been done in London charging scheme. The government should link the supply of cars with infrastructure betterment and development. The government could charge infrastructure tax on the sale of a vehicle. This would raise the price of a vehicle and would discourage people from buying additional cars if they already have one. This would result in lower traffic on roads and hence solve the problem of traffic congestion. The government could also forecast how many new cars would come on road each year by market research and then should invest in developing and building more infrastructures to handle the extra cars that would come out on roads that year. This way there would be fewer burdens on road and by using all the above discussed technique this traffic congestion problem would be solved after all for good. And one more thing I would like to is that sole responsibility of solving the problem of traffic congestion does not only fall on government but as responsible citizen we all should play our parts as well. What we can do is, we should use cars only when necessary, if possible we should try to use public transport. By not using our own cars during rush hours will not only save us from the road charging but will also be better for other people as there would be less traffic congestion and less people would stuck into traffic jams. This way other people who really need to make the journeys to the rush area will be able make quicker journeys like ambulances and etc. Read More