Beginning with the accompanying article The Financial Times discuss the economic argument for extending road tolls across the country. Road tolls cure form of road pricing and have already been introduced by the M6 spur road “M6 Toll road opens, the barriers at the M6 Toll booths were raised for the first time at 1010 GMT after a ribbon-cutting ceremony at which Transport Secretary Alistair Darling was the guest of honour” stated in the bbc article online and in the article “M6 toll road around Birmingham opened in 2003” , as it means of correcting Market Failure i.e. creating negative externalities created by traffic congestion as shown in the diagram 1. Market Failure is defined as misallocation of resources as a result of failure in the overproduction of the market mechanism. The price mechanism has three functions the rationing, the signalling and the incentive function. Traffic Congestion is a global issue faced by world economies. It has an impact on each individual, cars give off carbon dioxide fumes "contributes 27.2 million tons of carbon dioxide emissions each year” suggested online website newsroom. Congestion increases the amount of fumes as the cars are stationary for a short period of time. The fume causes global warming which harms the environment in the long term. Therefore traffic congestion is known to cause negative externality i.e. negative externality is the costs produced by the producers, but paid by the individual or to the rest of the society. Other cost arising from traffic congestion includes noise, time wastage for doctors, business opportunity could be missed, loss of live due to an ambulance maybe unable to reach hospitals. There is a lot of fuel wasted during traffic congestion causing pollution which is borne by the owner, leading to global warming by damaging the environment. Price
The diagram shows negative externality creating external costs causing the Marginal Social Cost curve to lie above the Marginal Private cost curve Diagram 1 shows there has been overproduction of traffic congestion and that is leading to welfare loss to society as MSC is greater than MPC. Our optimum output is at MSC=MPB due to welfare loss our current output is QS.
The problems caused by traffic congestion can be resolved by government intervention through use of various policies. The roles of government is to maximise the welfare of its citizens, if there is a welfare loss because of Market Failure then government intervention is appropriate .Firstly the government can impose fuel taxes such as road pricing to “while road pricing has long been used to finance new bridges and tunnel” stated in the article, to reduce traffic congestion. A tax on fuel would increase fuel prices, encourage people to use public transport and discourage the consumption of private transport. This can be shown in the diagram below.
The diagram shows that when a tax is placed on a good it shifts the supply curve to the left. The supply and demand for fuel is inelastic, a shit causes price to raise, a large amount from P1 to P2. However quantity demanded decreases by a small amount only so this policy will not work in the long term, as price elasticity of demand for fuel is inelastic. In addition an increase in fuel taxes, fuel such as petrol and diesel has very few substitutes. Therefore increasing fuel taxes will have little impact on congestion. S
Imposing taxation will shift the MPC curve to the left from MPC to MPC1 reducing the output from QP to QP2. This reduces the welfare loss compared in diagram 1 and is making people pay for the externality. However another disadvantage of imposing tax on fuel would result in inflation.
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