Question

Prior to 2003 , the city of London was often one big parking lot. Traffic jams were common, and it could take hours to travel a couple of miles. Each additional commuter contributed to the congestion, which can be measured by the total number of cars on London roads. Although each commuter suffered by spending valuable time in traffic, none of them paid for the inconvenience they caused others. The total cost of travel includes the opportunity cost of time spent in traffic and any fees levied by London authorities. a. Draw a graph illustrating the overuse of London roads, assuming that there is no fee to enter London in a vehicle and that roads are a common resource. Put the cost of travel on the vertical axis and the quantity of cars on the horizontal axis. Draw typical demand, individual marginal cost \((M C),\) and marginal social cost \((M S C)\) curves and label the equilibrium point. (Hint: The marginal cost takes into account the opportunity cost of spending time on the road for individual drivers but not the inconvenience they cause to others.) b. In February \(2003,\) the city of London began charging a \(£ 5\) congestion fee on all vehicles traveling in central London. Illustrate the effects of this congestion charge on your graph and label the new equilibrium point. Assume the new equilibrium point is not optimally set (that is, assume that the \(£ 5\) charge is too low relative to what would be efficient). c. The congestion fee was raised to \(£ 9\) in January 2011 . Illustrate the new equilibrium point on your graph, assuming the new charge is now optimally set.

Short answer

Answer: Congestion fees have an impact on the equilibrium points in the traffic congestion issue in London by shifting the Marginal Cost (MC) curve upwards, representing the additional cost per car. As the congestion fees increase, the new equilibrium points demonstrate how these fees can help achieve an optimal level of traffic by aligning the Marginal Social Cost (MSC) curve with the demand curve.

Step-by-step solution

Setting up the Axes and Drawing Demand Curve

First, draw the graph with the cost of travel on the vertical axis and the quantity of cars on the horizontal axis. Draw a typical downward-sloping demand curve, which shows the relationship between the cost of travel and the number of cars on the road.

Drawing the Marginal Cost (MC) Curve

The MC curve shows the additional cost for one more car added to the traffic. Draw the MC curve as an upward-sloping curve, showing that the marginal cost increases with the number of cars on the road.

Drawing the Marginal Social Cost (MSC) Curve

Since the MC curve doesn't account for the inconvenience drivers cause to others, the MSC curve will be higher than the MC curve. Draw the MSC curve parallel to the MC curve with a vertical distance representing the external cost to others from each additional car on the road.

Finding the Equilibrium Point without Congestion Fee

The equilibrium point can be found at the intersection of the demand curve and the MC curve. Label this point E1, which is the initial equilibrium without any congestion charges.

Illustrating £5 Congestion Fee Effect on Equilibrium Point

To illustrate the effect of a £5 congestion fee, shift the MC curve upward by £5, representing the additional cost per car. Find the new intersection of the demand curve and the shifted MC curve, and label this point E2. The new equilibrium is achieved but is not optimally set.

Illustrating £9 Congestion Fee Effect on the Optimal Equilibrium

Now, assume the £9 congestion fee leads to the optimal level of traffic. Shift the MC curve upwards by £9. The optimal equilibrium point is found at the intersection of the demand curve and the MSC curve. Label this point E3, which represents the optimal equilibrium achieved through the £9 congestion charge. In conclusion, this exercise demonstrates the graphical representation of the issue of traffic congestion in London. It shows the effect of congestion fees on the equilibrium points by illustrating the scenarios without a fee, with a £5 fee, and with a £9 optimally set fee.

Key concepts

Opportunity Cost

Opportunity cost represents the value of the next best alternative given up when making a choice. In the context of traffic congestion, opportunity cost is the time drivers spend stuck in traffic instead of using that time for other productive activities. For example, time lost in a traffic jam could have been spent working, studying, or relaxing. This concept plays a crucial role in understanding why traffic congestion is costly for individual commuters, as it highlights what they are foregoing by being part of the traffic.

• Opportunity cost is not always monetary; it often involves time and effort.
• In traffic congestion, opportunity cost includes the value of activities people could be doing instead of being stuck in traffic.

Comprehending opportunity cost helps in evaluating personal decisions and societal impacts when roads serve as a common resource.

Marginal Cost

Marginal cost is the additional cost incurred for each additional unit produced or consumed. In the scenario of traffic congestion, marginal cost refers to the additional inconvenience placed on all drivers from adding one more vehicle to the road. When you add a car to a congested road, it not only costs the driver in terms of time and fuel but also adds to the congestion everyone else experiences.

• Marginal cost rises as more vehicles jam into the same road network.
• It reflects not just the cost to the individual driver but also the cost induced on others.

Understanding marginal cost helps in designing policies such as congestion pricing, which aims to charge drivers the true cost each additional vehicle imposes on the system.

Equilibrium Point

The equilibrium point is where demand equals supply, and a balance exists without excess demand or supply. In terms of traffic, this is where the number of vehicles on the road meets the road's capacity, without congestion worsening or easing. Initially, the equilibrium is found where the demand curve intersects the marginal cost curve, meaning drivers are only accounting for personal costs, not the congestion they contribute to.

• Without congestion fees, demand and individual marginal cost determine the equilibrium point.
• Introducing a congestion fee shifts the equilibrium, hopefully reducing traffic to more manageable levels.

Exploring various equilibrium scenarios, such as before and after congestion fees, reveals the traffic balance at different congestion charge levels.

Common Resource

A common resource is a type of good that many people can access and use simultaneously, but where individual consumption can reduce availability for others. Roads are a classic example of a common resource. They are open for anyone's use but can become overcrowded, diminishing their overall utility. Unlike private goods, where consumption is typically restricted, common resources can lead to overuse and congestion problems like those seen in London.

• Common resources necessitate management to prevent overuse.
• They can lead to a tragedy of the commons where overuse depletes the resource's value.

Strategies like congestion fees help regulate use, ensuring that roads remain usable and do not reach overcapacity.

External Cost

External cost, also known as externalities, occur when the action of an individual or company imposes costs on others, not reflected in the market prices. In the London traffic case, each driver's presence incurs time and convenience costs for others, which the individual driver does not directly pay for. These unaccounted costs represent the external cost of driving in city traffic.

• External costs lead to inefficiencies, as they encourage overconsumption or inadequate management.
• Congestion charges aim to internalize these costs, adding them to the individual decision-maker's cost structure.

By understanding and adjusting policies to account for external costs through fees or regulations, cities can better manage traffic congestion and improve road utility for everyone.