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Externalities - Reflective Exercise

What are the economic arguments on whether large cities that have congested roads should charge a road tax?

Learning Focus

Developing an understanding of the working and limitations of the market mechanism by considering an externality.

Threshold Concepts

The concepts pivotal to this learning are:

  • Welfare and efficiency
  • Partial Equilibrium
  • Incentives

Other threshold concepts used are marginality and economic modelling.

Problem 1

Which of the following are essential in deciding whether congestion should be regarded as an economic problem? Compare your answer with an economist's answer.

(Tick however many of the following you think appropriate)

(a) * It is the individual's choice as to whether they use the crowded roads and this is a free country. Congestion is not an economic problem
(b) * The crowded roads mean that people are late to work and other appointments.
(c) * An individual deciding to travel at peak time imposes costs on other people who are also travelling by increasing their delay and increasing their petrol costs.
(d) * Travelling at peak time increases pollution because of extra fumes from the slow moving traffic.
(e) * Motorists pay a lot in taxes and should not have to sit in traffic jams.

Problem 2

Before the introduction of any system for paying for roads, the number of cars on a stretch of road at a particular time will reflect...

(Tick however many of the following you think appropriate)

(a) The number of drivers for whom the benefits of using the road just cover all the costs incurred by their journey.
(b) The capacity of the road.
(c) The number of drivers for whom the benefits of using the road for that journey are equal to or outweigh the costs to them of using the road
(d) The maximum number of drivers that can be accommodated before additional drivers start causing increased costs for others

Translating this argument into a diagram

Externalities graph

On the diagram, price is used to measure the marginal benefits and costs of the journey. Quantity measures the number of drivers using the road at a particular time.

A printable version of this diagram is available here.

Label the lines which you think show:

  • The benefits to the drivers from using the road (MB).
  • The cost to each additional driver of using the road (MPC).
  • The cost to everyone of each extra driver joining the road (MSC)

Which point on the axes shows:

  • the number of drivers who would use the road if there was no road pricing?
  • the marginal cost to each additional driver of using the road when there is no congestion?
  • the marginal cost to each additional driver of using the road at the level of road use when there is with no road pricing?
  • the number of cars that would use the road if individual car drivers had to bear the costs they caused to others as well as the costs they cause to themselves?

Problem 3

What does this diagram show about the most efficient level of road use?

(Tick however many of the following you think appropriate)

(a) There would be no congestion
(b) Road use would fall by Q2-Q3
(c) It would be where the cost to a driver of using the road on that journey would be just equal to the benefits they got from using it.
(d) Road use would fall by Q3-Q1

Task

Now write about the ideas that an economist is using to analyse this situation.

  1. What ideas are used in the economist's argument that are not usually used in everyday reasoning?
  2. What conclusions does an economist come to that a non-economist might not?

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