Road is a common resource and congested roads is an example of the tragedy of the commons. Because roads in most countries are free at the point of usage and there is little or no monetary incentive for motorists not to over-use them. This results in over usage of roads to the point where traffic collapses into a jam and there are heavy losses to traffic congestion. Traffic congestion results in market failure as it is a form negative externality that distorts the socially optimal workings of the free market. Market failure arises when the free market failed to allocate resources in a socially efficient manner and a negative externality is the cost that affects someone who is not directly involved in the over production or consumption of the good. The negative externality in this case is the time wasted on road which poses inconvenience to motorist and also triggers a chain reaction, from pollution to lost man-hours (Goh, 2002) which can cost up to $10 billion a year in Australia (Stanley 2011). The implementation of congestion tax would help to control this situation and this is illustrated below.
In the free market, as motorists will only take into consideration of their private benefits, they will consume at the level where private benefit, which is also the social benefit equals to the private cost as shown in the diagram above at equilibrium E0 with P0 and Q0. However, the economically efficient level is at E1 where social cost equals to social benefit. Thus, there is a need for the government to impose the congestion tax to bring the Equilibrium back to its socially optimum level. The government should impose the congestion tax at P1 and must be equal to the external cost of driving on road. This amount of tax imposed at P1 will internalise the external cost and close the divergence between S1 and S2. As a result, the supply curve will shift from S1 to S2 and the market equilibrium will move from E0 to E1 where the quantity of car trips is...
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