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Mind your Business - 23 February 2004
Negative Externalities, Transport Policy and Congestion Charging
The News
Congestion charging:
The congestion charge introduced in London is one year old and as part of its birthday, different groups have been reflecting on the success or otherwise of the policy. Whilst the charge clearly affects those who live in the London area and who have to live and work there, it has relevance for many other towns and cities in the UK, given that they have been watching the progress of the London charge with interest. If the charge appears to work there would be an incentive to introduce similar schemes in other towns and cities that suffer from congestion - and that could mean almost anywhere!
The charge came into force in London on February 17th 2003. Motorists entering the charging zone between the hours of 7am and 6.30 pm have to pay a fee of £5 per day . The charge is exempt to certain vehicles and owners who must register in advance to claim their exemption. The congestion-charging zone has a network of 230 cameras situated on and within the zone limits. Details of vehicles passing into the zone are compared to database records of those who have paid the charge. Those that do not pay the charge are liable to a fine of £80. The fine is halved for prompt payment but rises to £120 if ignored, with the potential for the offender to be taken to court in extreme cases.
The charge was controversial to say the least but since it was introduced, 1.1 million people every day are taking the bus into the centre while trains and the tube have seen increases of around 10% in passenger numbers. The reduction in traffic has been hailed a success in terms of reducing congestion and improving the quality of life in general in the city but not everyone is convinced. Businesses, especially shops have complained that the charge has led to a reduction in the number of people coming into London to do their shopping and those who do, have changed what they buy. They are tending not to buy larger, bulkier items because they are more difficult to take home on public transport.
On another side, the cut in the number of vehicles using the zone's roads - estimated to be around a third - has meant that the money raised from those paying the charge has not been as high as expected and as such the funds available for the investment into public transport is not as high as hoped. It was estimated that the scheme would raise a surplus of £200 million but this figure is expected to be closer to £68 million.
Other problems associated with the scheme have been the ease of payment method - although there are 7 different ways of paying the charge - and the problem of ensuring that transgressors are chased up and pay their fines. The Mayor of London, Ken Livingstone is considering plans to extend the charging zone.
London has long suffered from traffic congestion, the average speed in the centre of London was reputed to be less than 10mph!
Title: Traffic Jam. Copyright: Getty Images, available from Education Image Gallery (http://edina.ac.uk/eig)
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Theory
Congestion charging is one method that seeks to correct a negative externality by what is known as 'internalising' the externality. An externality is an impact on a third party of a decision. In this case study, the decision is that of people who have chosen to use their cars as a means of transport into central London, causing congestion which has an impact on a wide range of other people - businesses, individuals, hospitals, emergency services, police and so on. The combined cost of all the third party effects is a considerable sum. One of the problems of working in this area of economics is calculating the costs of such decisions. Congestion, for example, creates various problems:
- Pollution - the number of cars emitting pollutants into the atmosphere.
- Waste - the petrol being used when cars are at a standstill and engines are being used inefficiently.
- Time lost for those who are working and arrive late to work, meetings, making deliveries and so on.
- The cost for freight transporters in having to adjust times for deliveries and collection etc. to cope with the congestion - including the cost of the wages of the drivers, fuel use, etc.
- The wear and tear on the roads of the number of vehicles using them.
- Cost to the NHS of having to treat people with respiratory diseases - the UK has the highest incidence of asthma amongst young people in Europe - and the cost of treating people involved in vehicle accidents.
- Cost to employers of people missing work through stress that can occur when people have to commute every day and get frustrated by their apparent lack of progress.
- The cost of policing the roads in and around the capital.
In many cases it is very difficult to be specific about the extent of these costs but estimates can be made. In 1997, for example, Friends of the Earth reported that the estimate for the cost of traffic congestion in London was £37 million per week or over £2 billion per year. More recently, a report by a group put together by the Home Office called Telecommuting 2000, suggested the figures for the country as a whole were as follows:
- They estimated the number of miles travelled by commuters in the UK to be 78.5 billion, making the cost of that travel to workers £13.5 billion, and the cost to UK business of congestion to be £20 billion. (Source of data: Telecommuting 2000, http://www.flexibility.co.uk/telecommuting2000/tc2002.htm)
Part of the problem with externalities is that the decision maker is not necessarily the one who incurs the cost of their decision. We all sit in our cars and complain about traffic jams, oblivious to the fact that we are a cause of the problem we complain about. To solve the problem therefore, economists suggest that you have to make the perpetrator of the cost take responsibility for the cost they are imposing on others - in other words to internalise the externality.
Image: Motorists entering the zone are given clear information about the time the charge operates and where it applies.
Consider a simple analogy. Imagine your home circumstances and your use of the family telephone. If your parents told you that you could use the telephone at any time of the day or night for nothing, the chances are that you would use it to excess. The cost of the use of the telephone is borne by someone else - your parents probably! Telephone use would be excessive. If, however, your parents decided to make you aware of the cost of the use of the phone and installed a device that clocked the minutes you spent on the phone and then charged you for that use, it is highly likely that you would limit your calls to the bare minimum. So it is with congestion. Too many people use their cars in relation to the supply of road space so the answer is to make people more aware of the cost they are imposing by charging them.
In 1951, Milton Friedman, the economist who championed the use of controls of the money supply to influence economic activity, was a joint author of an article linking road use with payment by the user. In 1988, the essay was rediscovered and later published; the Mayor of London, Ken Livingstone, cited the essay by Friedman as the inspiration behind his plans to introduce the congestion charge in London. The irony of 'red Ken' using the ideas of a right wing economist is not lost on many!
There are a number of methods of trying to reduce congestion, apart from the idea adopted by London, of users paying a charge.
- A form of electronic monitoring system that charges users according to the amount they use their cars - the car is fitted with a device that is 'read' by systems in or at the side of roads, the driver receives a bill or can buy a charge card similar to a phone card.
- Encouraging people to use public transport - necessitates providing more and better quality public transport.
- Rationing road use:
- Stipulating when vehicles can use roads possibly linked to whether the vehicle registration plate has odd or even numbers?
- Placing tolls on roads.
- Encouraging people to use roads when they are not busy and reduce demand for roads when they are busy - may necessitate changes to working practices.
- Encouraging more efficient use of the roads through car sharing schemes increasing the cost of the road fund licence.
- Raising the age at which people can drive.
- Increasing the price of fuel so that those who use their cars must pay for it directly.
These methods all, in some way or another, increase the responsibility for the choice of using vehicles onto the prime user. If these measures, individually or in combination, are used the chances are, as in the London experiment, that vehicle numbers will fall.
This is likely to, at least partly, solve the problem of congestion but as in the London experience it may lead to side effects that may or may not be anticipated. Whether the policy as a whole works therefore is dependent on the value of the benefits of the policy (the reduction in congestion) and the value of the costs of the policy. The respective values have to be the same unit of account to be able to facilitate a comparison to be made between them. If the former outweighs the latter then it can be concluded that the policy is worthwhile. Such an approach reflects a more formal 'cost-benefit analysis'.
Image: Congestion Charging - does it work? Vehicle use down 15% but what is the impact on other businesses?
The experience of London so far has not provided conclusive evidence as to the success or otherwise of the project; it is likely to need more years before any firm conclusions can be drawn but the early signs suggest that other cities will be looking to plan their own congestion charging schemes in the not too distant future.
Tasks
- Produce a mind map or list, depending on your preference, of as many potential costs and benefits of some form of road pricing scheme as you can think of.
- Describe how you might go about assigning a value to the costs and benefits you have identified in the task above.
- Using appropriate diagrams, explain how congestion charging might lead to a more socially efficient use of roads.
- Look at the list of potential methods of reducing congestion in the 'Theory' section above. Assess the potential for these measures in reducing congestion.
- Imagine another major UK city was investigating policies to reduce congestion. Present a cost-benefit analysis to the Council on a selected policy for reducing congestion. The policy could be one measure or a combination of measures.
Extension Task
Try the 'Tackling Traffic Congestion' acitivty in the Biz/ed 'Virtual World' section: Tackling Traffic Congestion Biz/ed Virtual Learning Arcade (http://www.bized.co.uk/virtual/vla/transport/index.htm)
Related Web sites for research
Mark Scheme
- Produce a mind map or list, depending on your preference, of as many potential costs and benefits of some form of road pricing scheme as you can think of.
The intention of the mind map is to encourage thinking about the far-reaching implications outside the obvious effects of some form of road pricing scheme. Price acts as a signal to producers and consumers about the relative nature and strength of demand and supply. Any changes in prices can have effects on people's behaviour therefore. The fact that retailers have suggested that people are not buying as many 'bulky' items may not have been something that was obvious when the London congestion charge scheme was first thought about!
- Describe how you might go about assigning a value to the costs and benefits you have identified in the task above.
This can be quite tricky. Some costs are going to be relatively easy, the cost of implementing the scheme - buying cameras, painting road signs, producing and installing new road signs, etc - but others may be more difficult. Can you put a value on the reduction in pollution? Can you make a direct link between incidents of asthma and pollutants from vehicles?
One way in which some of the more complex costs and benefits can be assessed is to consider the likelihood of something happening and multiply it by the unit cost. For example, if the risk of accidents involving injury to pedestrians is 0.15 per vehicle and the cost of treating a patient with an injury sustained in a road accident is an average of £5,500 then the cost could be expressed as 0.15 x £5,500 x the number of vehicles using the roads.
You do not need to come up with specific figures for this section although you may be able to come up with some more definite figures by using the research links we have provided above. The aim of the question is to get you thinking about the way in which complex decision-making can be assessed.
- Using appropriate diagrams, explain how congestion charging might lead to a more socially efficient use of roads.
There are two links above to Biz/ed presentations that take you through the theory of externalities and show you how the diagrams that relate to these theories can be used. The assumption in the question is that congestion exists because the private cost is lower than the social cost and as a result there are too many cars on the roads. The socially efficient output would be where the MPC + MSC = MSB - the presentation should help make this clearer. The question is designed to help you apply theory to a practical problem and build your confidence in using models to help explain economic and business concepts and issues.
- Look at the list of potential methods of reducing congestion in the 'Theory' section above. Assess the potential for these measures in reducing congestion.
The key word here is 'assess'. The list tells you the policies; you have to think about how effective they are going to be. For example, the notion of reducing demand for road use by changing working practices. How would this work? Essentially, it means two things. Reducing the rigidity around working hours. If the working week is 35 hours then does it matter when those 35 hours are worked? Some people may prefer to get up later and work into the early evening, others work early and leave early. Such a transition would reduce the notion of a 'rush hour'. But, how practical is it? What sort of jobs would lend themselves to this type of flexible practice and what jobs would not?
Secondly, a change in attitude would be necessary. Many people these days work in offices where their day is spent working primarily with computers. If so, could this type of work be done at home? The introduction of broadband and wireless technology should mean that such practices could become far more widespread. But, firms may need to adjust their views of the workforce for this to happen. Do they trust the workers to do the job at home in the same way that they might in an office environment? How many jobs would this relate to - this would have a significant implication on the effect on road use as a result!
You will have to think about such issues in each case so consider just how significant the effects might be or how strong the incentive has to be before there is any significant shift in behaviour that will bring about the desired impact.
- Imagine another major UK city was investigating policies to reduce congestion. Present a cost-benefit analysis to the Council on a selected policy for reducing congestion. The policy could be one measure or a combination of measures.
If you live in or near a major city, you could answer this one from the perspective of that city or town. If you have answered the questions above carefully, you will have the basis for the answers for this question. You will have to be selective about which measure or combination of measures you choose and consider the likely costs and benefits - the first two tasks should have helped prepare the evidence for you here! If you believe that the benefits of the measure/s you have suggested outweigh the costs then your advice would be to go ahead with it! If not, then advise the Council to think again!
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