Reflective Exercise: Road charging – an end to congestion?
1
What are the economic arguments on whether large cities that
have congested roads should charge for use of roads?
Scenario
In Britain, roads in our cities are congested at peak times. In London, a system of
charging motorists (a congestion charge) has been introduced and this is being
considered as a policy for several other cities. This exercise investigates the
economic case for such a measure.
Section 1: Setting the framework for investigating this question
A Which of the following are essential in deciding whether congestion should be
regarded as an economic problem that cannot be solved by the market
(price) mechanism?
Tick however many of the following you think appropriate
a It is the individual’s choice as to whether they use the crowded
roads. This is a free country and it is of no concern to others.
b Motorists need extra road provision because of the crowed roads
and they pay a lot of taxes already.
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 and this affects people other than the
motorists.
feedback page 5
B
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 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.
c The maximum number of drivers that can be accommodated
before additional drivers start causing congestion and increase
costs for others.
feedback page 5
Copyright: Embedding Threshold Concepts Project
23/08/07
This project is funded by the Higher Education Funding Council for England (HEFCE) and the Department for Employment
and Learning (DEL) under the Fund for the Development of Teaching and Learning.
Reflective Exercise: Road charging – an end to congestion?
2
C Economists take into account the marginal benefits and costs in
decision making.
Tick however many of the following you think are appropriate
a
b
c
d
e
Drivers cannot choose whether to go on a journey. All journeys give the
same benefit.
Some journeys give more benefit (or utility/or may be considered more
essential) to a driver than others and so the marginal benefit of additional
journeys falls.
Some journeys give less benefit (or utility/or may be considered less
essential) to a driver than others and so the marginal benefit of additional
journeys rises.
The marginal private cost of undertaking a journey depends on the fuel
and other costs to the driver and for a given length of journey the
simplifying assumption of economists that it is always constant.
Since the marginal private costs include the costs of time, economists
assume that marginal private costs increase once roads become
congested.
feedback page 6
Copyright: Embedding Threshold Concepts Project
23/08/07
This project is funded by the Higher Education Funding Council for England (HEFCE) and the Department for Employment
and Learning (DEL) under the Fund for the Development of Teaching and Learning.
Reflective Exercise: Road charging – an end to congestion?
3
D Translating this argument into a diagram:
On the diagram, price measures the marginal benefits and costs of the journey.
Quantity measures the number of drivers using the road at a particular time.
Label the lines which you think show:
a. The benefits to the drivers from using the road (MB = marginal benefit).
b. The cost to each additional driver of using the road (MPC = marginal private
cost).
c. The cost, including that imposed on others, of each extra driver joining the road
(MSC = marginal social cost).
Which point on the axes shows:
1. The number of drivers who would use the road if there was no road pricing?
2. The marginal cost to each additional driver of using the road when there is no
congestion?
3. 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 their own costs?
Figure 1: The optimum use of roads
Price
feedback page 6
(Marginal Benefit
Marginal Cost)
P3
P2
P1
Q1
Q2
Q3
Quantity
(No of drivers using the road)
E
What does this diagram show would be the most efficient level of road
use compared to the unregulated market?
Tick whichever of these you think is appropriate
a There would be no congestion.
b Road use would be lower by Q3 to Q2.
c It would be where the cost each driver pays for the journey equals the
benefits they get from using it.
d Road use would be lower by Q3 to Q1.
feedback page 6
Copyright: Embedding Threshold Concepts Project
23/08/07
This project is funded by the Higher Education Funding Council for England (HEFCE) and the Department for Employment
and Learning (DEL) under the Fund for the Development of Teaching and Learning.
Reflective Exercise: Road charging – an end to congestion?
4
Section 2: Identifying relevant concepts and ideas
1. Try and identify the concepts that economists use to analyse this situation. Use
the feedback from section 1A to 1F to help with this.
2. How does the way that economists analyse a situation, by using the above
concepts, differ to that of everyday reasoning?
3. What conclusions do economists come to that a non-economist might
not?
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feedback page 8
Copyright: Embedding Threshold Concepts Project
23/08/07
This project is funded by the Higher Education Funding Council for England (HEFCE) and the Department for Employment
and Learning (DEL) under the Fund for the Development of Teaching and Learning.
Reflective Exercise: Road charging – an end to congestion?
5
Feedback Section 1: setting the framework
A Which of the following are essential in deciding whether congestion should
be regarded as an economic problem?
In economics a road that becomes congested is a scarce resource and we are
concerned with the effects of people’s choices of using it on the overall welfare of
society. If I use my car to travel to work when I know that the road will be
congested I am making a choice amongst alternatives. Choices in economics are
not always between pleasant alternatives: I could get a job elsewhere, travel at
different times or by public transport. We assume that people do what best suits
them from the alternatives available.
However, this may not always be the best for society, as by travelling on a
congested road I add to the problems faced by others – I marginally decrease the
speed that everyone else is travelling and therefore make them all a bit later,
causing them to raise slightly their fuel consumption and emissions. I don’t have to
pay for any of these costs I impose on others, so this does not enter my personal
calculations. (Similarity other motorists don’t take into account the extra costs they
impose on me!) This is the economic problem – (c), not (a) or (b). This makes (d) a
problem too in that I don’t have to pay for any increase in emissions that result from
my use of the road. Other people – those living near the road, driving other vehicles
and through atmospheric change those living far distant from me – all have to bear
this cost of my journey and virtually none of this cost falls on me.
B
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 …
Without any road pricing system car drivers will go on a journey at a particular time
if the benefit to them equals or exceeds the costs to them regardless of any effects
on others (so that the correct answer is (b) not (a)).
We could rank the car drivers in terms of how much benefit they personally would
get out of using the road. To begin with, additional drivers joining the road will face
costs no different from if they had been the first on the road. However, there will
come a point when the road will start to get congested. Drivers will slow each other
down. Drivers who join the road when there is already some congestion will face
higher levels of cost because their journey will be longer. The more cars that are on
the road the longer the journey will take and the higher the cost to each new driver
joining the road. Assuming that each successive person joining the road gets slightly
less benefit from doing so and also tends to face slightly higher costs we will reach a
point where benefit to the additional driver just equals cost to the additional driver
and this is the point that will determine the number of cars on the road (not (c)
where there is no congestion).
Copyright: Embedding Threshold Concepts Project
23/08/07
This project is funded by the Higher Education Funding Council for England (HEFCE) and the Department for Employment
and Learning (DEL) under the Fund for the Development of Teaching and Learning.
Reflective Exercise: Road charging – an end to congestion?
6
Feedback Section 1: Setting the framework (cont)
C
Economists take into account the marginal benefits and costs in decision
making
Some journeys give benefit (or utility/or may be considered more essential) to a
driver than others. For instance a trip to visit your girl or boy friend may give you
higher utility than a trip to visit great aunt Jane. If we think of ranking journeys by
their benefit, as the quantity of journeys increases the marginal benefit declines.
Thus (b), not (a) or (c), is correct.
The marginal private costs reflect the costs of fuel, etc. and the time costs of travel.
This increases when the road starts to get congested: so (e) not (d) is correct.
D Translating this argument into a diagram
Figure 2: The optimum use of roads - labelled
Price
(Marginal Benefit
Marginal Cost)
Marginal
Social Cost
Marginal
Private Cost
P3
P2
P1
Marginal
Benefit
Q1
Q2
Q3
Quantity
(No of drivers using the road)
From C(c) above, as the quantity of journeys increases the benefit from each
declines, which means the marginal benefit curve slopes downwards. Also we
established in C(e) that marginal private costs increase when the road starts to get
congested (at Q1 in our diagram). Because driving on a congested road adds to
the costs of others (see A(c)), the marginal social costs increase at a higher rate.
Thus the correct labelling of the points on the axes are:
1.
Q3
2.
P1
3.
Q2
Copyright: Embedding Threshold Concepts Project
23/08/07
This project is funded by the Higher Education Funding Council for England (HEFCE) and the Department for Employment
and Learning (DEL) under the Fund for the Development of Teaching and Learning.
Reflective Exercise: Road charging – an end to congestion?
7
E What does this diagram show would be the most efficient level of road
use compared to the unregulated market?
With this kind of question, efficiency in economics is taken as applying to society
overall, not the individual (see part 1A). An economist would consider the costs and
benefits and look at removing any situation where the costs of a particular journey
outweigh the benefits overall to society, not just to the individual.
Applying this to this example:
* If we consider the journeys that are shown as Q2-Q3 in our diagram, for each
individual driver the benefits to them are greater than the costs to them. As a purely
private decision, they should undertake the journey.
* However, once we take into account the costs to others, the benefit from those
drivers’ journeys is less than the costs (see part 1B). The economist would refer to the
marginal social benefit of these journeys being less than the marginal social costs
and conclude from this that these journeys are undesirable from society’s point of
view.
* Below Q3 the benefits of each driver’s journey are greater than the costs,
including the costs imposed on others, so from society’s viewpoint as well as the
private, individual viewpoint, there is a net gain from undertaking the journey. So a
certain amount of congestion would have to be lived with.
Thus (b) is the correct answer.
Copyright: Embedding Threshold Concepts Project
23/08/07
This project is funded by the Higher Education Funding Council for England (HEFCE) and the Department for Employment
and Learning (DEL) under the Fund for the Development of Teaching and Learning.
Reflective Exercise: Road charging – an end to congestion?
8
Feedback Section 2: Identifying relevant concepts and ideas
1. and 2. What ideas are used in economists’ arguments that are not
usually used in everyday reasoning? Important among these are:
(a) Opportunity cost The economist considers that there is a cost to using
scarce resources even if they are not directly charged for – in this case
the roads and other factors such as people’s time.
(b) Welfare economics The congestion is not ‘bad’ simply because it
slows up the traffic and frustrates drivers: it is a problem because it
means people are imposing costs on others that they are not taking
account of in their personal decision making – an externality.
Economics considers these costs should be taken into account to
improve the efficiency of the economy and economic welfare. We
are examining the effect on the economy as a whole, not individuals.
(See part 1A.)
(c) Marginality We need to consider the benefits and costs (including
the externalities) of the marginal journey and consider if this journey is
worth undertaking from society’s viewpoint (not the total or average).
(See part 1B.)
(d) Incentives We start by considering demand and supply, but
recognise that at the equilibrium position there is market failure
because of the externality. Individuals who are driving are not
bearing the full costs of the congestion. Prices are incentives and by
changing prices we can alter use of resources such as roads. The aim
with road pricing is to charge a price that reflects the full marginal
(social) costs. (See part 1C.)
3. What conclusions does an economist come to that a non-economist
might not?
(a) Charging may be a sensible way to reduce traffic congestion if it
reflects the externality costs.
(b) Although we should reduce congestion this will not be to the point
where there is no congestion. (See part 1C.)
Copyright: Embedding Threshold Concepts Project
23/08/07
This project is funded by the Higher Education Funding Council for England (HEFCE) and the Department for Employment
and Learning (DEL) under the Fund for the Development of Teaching and Learning.
Reflective Exercise: Road charging – an end to congestion?
9
Notes for lecturers
Objectives of the exercise and prerequisites
Learning Focus: Developing an understanding of the working and limitations of the
market mechanism by considering an externality.
Threshold Concepts that are pivotal to this learning are welfare economics and
incentives. Other threshold concepts used are marginality and economic
modelling.
Prior Knowledge Required
Students require an understanding of demand and supply and marginality.
The exercise can be used to embed ideas on welfare economics and in
particular externalities introduced in lectures. With additional support from
the lecturer it can also be used to introduce these ideas without a previous
lecture.
Sequencing and timing
1. With this exercise, the feedback to section 1 parts A, B and C is better
given to students before they attempt section 1 parts D and E. (These
sets of answers are provided on separate pages to enable this to be
done with ease.) Students need the correct diagram in section 1D
before going on to section 1E. You may like to draw this on a
whiteboard or put it on an OHP for discussion before they proceed to
section E (giving them the written feedback after completion of
section 1E).
2. The feedback to section 1 should be given before students attempt
section 2. In section 2 students are asked about the ideas in the
economist’s argument and the feedback concentrates on four
threshold concepts that are important.
3. The exercise will take around 45 minutes to complete if all of it is done
in class.
Copyright: Embedding Threshold Concepts Project
23/08/07
This project is funded by the Higher Education Funding Council for England (HEFCE) and the Department for Employment
and Learning (DEL) under the Fund for the Development of Teaching and Learning.