The increase in road charges will act to change the market price signals for transport.

The higher road charges will increase the marginal private costs of car drivers. The higher marginal private cost will shift the marginal private cost curve upwards and to the left. This should reduce the quantity of vehicles on the road, and the level of congestion.

(Disclaimer Statement: Note the following is a very broad statement that has been used for educational purposes to illustrate theory. The actual relationship may not always hold due to the complexities of the issues. Therefore, it may not always be taken literally in practice.)

The problems with this policy stem from issues relating to the size of the change and the wider implications on the economy.

• The reduction in car use may be very small due to the price elasticity of the demand for car use. For instance, if the demand curve is very inelastic then there would need to be a very large increase in price to result in a significant fall in the quantity of vehicles on the road. The explanation for why the demand curve is inelastic is associated with the limited number of close substitutes for cars.
• Road charges may have adverse impacts on the wider economy. For instance, the road pricing scheme will increase the cost of operating commercial vehicles. If these costs are significant and passed on through higher prices, then there may be implications for cost-push inflation.

The default level of road charges is set at £0.00 in the model. However, it can range between £0.00 to £0.50 pence per mile

University students can apply their knowledge of indifference curve analysis to illustrate changes in consumer behaviour as a result of the imposition of road charges. How will the consumer equilibrium change when road charges are implemented? What will shift - the indifference curve or the budget line?

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