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Discuss the Pros and Cons of Implementing a Nationwide Road Pricing Scheme

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    Discuss the pros and cons of implementing a nationwide road pricing scheme The introduction of a nationwide road pricing scheme has been extensively considered in the UK. Early deliberations in the ‘Smeed Report’ implemented road pricing in 1962 using a colour coding system. With computing and telecommunications changes in recent years there is potential for the road pricing scheme, which was a component of the labour manifesto in 2005 using satellite navigation to track vehicle activity, to be developed and implemented.

    The concept of introducing a market for roads through road pricing has become a highly discussed topic due to the complexity of the operation and how it could revolutionise the actions of drivers in the future with a target of tackling congestion. There are different types of road pricing including cordon, distance and area schemes. The scheme proposed by transport secretary Alistair Darling in 2005 was a form of road pricing called distance and area pricing which uses tracking technology in cars to record driving and then charge between 2p and ?1. 34 per mile depending on the level of congestion and time of day.

    The reduction of congestion would be beneficial to the environment, ‘This is due to the fact that better traffic flow causes less emissions per kilometre driven. Emissions such as volatile organic compounds (VOC) and carbon monoxide (CO) (both are main components in smog) are 250% higher at congestion than when the traffic flows’. This means that less traffic jams would cause fewer emissions as a secondary benefit. The economic rationale for congestion is ‘Tragedy of the Commons’ which is a dilemma arising from overconsumption of a common good which is in finite resource, for example roads.

    The over-utilization of roads occurs from the divergence between marginal social and marginal private costs. This is shown in the graph below, the divergence between the social welfare maximising point of consumption Q* and the amount consumed Q is the extra quantity consumed because the agent does not realise the real cost (P s) so too much is consumed. A tax to allocate the resources can be set so that P* is paid by the agent and Q* is demanded if the tax set equal to the gap between MSC and MPC.

    Market failure can be corrected if the marginal negative effect of the failure and also the total marginal cost of the abatement are known. There is also room for flexibility as the system is electronic therefore charges can be altered easily. The government can decide on an optimal flow level of traffic and find out by testing the scheme to see what prices can result in it. Above the maximum free flowing capacity of a motorway, the marginal social cost of an additional driver on a road increases the travel time for all drivers using the road.

    This cost (increased travel time) is not considered by the driver so the Marginal Private Cost is equal to zero. As long as the Marginal Private Benefit is higher than zero, commuters will use the motorway system. Another reason that congestion occurs is due to the high explicit fixed costs of owning a car. After purchase of a car, the next highest payment is insurance which increase by an average of ?215 this year, and other fixed costs such as road tax. Variable costs such as petrol and maintenance are lower so after these high fixed costs have been paid for a car, there is an economic incentive to use it.

    Congestion is a deadweight welfare loss and is a big problem as ‘on a daily basis a quarter of main roads are jammed for an hour and there are between 200 and 300 incidents of major congestion. ’ This amount of congestion can be put in monetary costs estimated by the European Union as 2% of annual GDP. The road pricing scheme could be a very efficient way of reducing congestion as it could separate drivers based on how much they value the journey derived from the price elasticity of demand which measures responsiveness of quantity demanded to a change in price.

    Drivers are far from homogenous and will all value time and journeys differently. Therefore ‘a system with both time-allocated and financially allocated facilities could well be optimal’ If a person is price elastic (Person A in the graph below), demand responds more than one-for-one with a change in price therefore this could be interpreted as the journey not being worth the new price. A substitution effect could occur towards use of public transport resulting in less congestion. Person B represents a person exhibiting price inelasticity with respect to demand where a large change in price will lead to a smaller change in demand.

    This differentiates between people who will still use the road despite the high price, and those who may make the journey at a different time, use a different route, or don’t make the journey at all. This will ultimately decrease congestion, particularly in high priced areas, and the people who will pay the price enjoy less congestion on the journey. The graph below shows the distribution of traffic flows at different times and days of the week. There are drastic changes with peak times around 9 and 5 with a drop in the middle of the day.

    The technology needs to be advanced enough to use information like this to target high amounts of congestion while allowing people to still make their journeys if they can be flexible on time. Although the road pricing scheme can be considered a ‘fair’ allocation of road space in the sense that it is putting a monetary value on a good which is limited in supply, the scheme could increase inequality as high income people may continue their behaviour because they can afford the prices so their demand is price inelastic.

    People in a lower income bracket will be the ones who are hit hardest and have to change their driving behaviour as the road pricing is independent of income, exhibiting price inelasticity. This increase in inequality which could be a result of road pricing can be illustrated using the Lorenz curve which shows the distribution of wealth, with increased inequality leading to a shift away from the line of equality as shown by the arrow showing a higher proportion of income going to a smaller proportion of people.

    There is a correlation between work flexibility and income so people with less income will have to pay the peak time charges and the Lorenz curve will shift. As the main aim of the scheme is to reduce congestion people may feel as though they are being ‘Priced off the roads. ’ The Gini Co-efficient shows distribution between households, it was recorded that following the London Toll introduction, the co-efficient increased from 0. 2778 to 0. 2785. Changes in road pricing have not been perceived well by the public in the UK.

    The scheme has been viewed as an invasion of privacy due to the tracking technology. After a referendum in Edinburgh ‘the widespread political opposition was reflected in the vote: 74% of people voted against the plan’. An online petition against road pricing was signed by 1. 8 million people showing the depth of feeling against road pricing. However, with the highest fuel duty in the world being increased above inflation each year, UK citizens do not share a general consensus of the current cost of driving. Congestion charges have been successful in other parts of the UK.

    The congestion charge in London has lead to a 6% increase in bus passengers which shows that the UK has responded by changing driving behaviour. Road pricing has also been used in other parts of the world. The electronic road pricing scheme introduced in Singapore in 1998 used was a cordon pricing method which charges drivers to enter a restricted area. Although publically unpopular it was ‘reported that road traffic decreased by nearly 25,000 vehicles during peak hours, with average road speeds increasing by about 20%.

    Within the restricted zone itself, traffic has gone down by about 13% during the operational hours’. There was also a reported increases in car sharing, providing incentives for people to car share has been tried across the UK which systems such as one lane for car sharers. The road pricing scheme could provide a fiscal incentive to car share which would cut levels of congestion particularly in rush hours. Another congestion reducing scheme is to either build or expand roads.

    This would cut congestion but is a costly procedure, particularly with competition for the resources required to build roads from India and China driving up road production costs . In some areas there is limited space to expand roads. According to the theory of ‘Induced Demand’ an increase in the supply of a good will lead to an increase in demand, therefore more drivers may take to the road to match the expansion and congestion will not be reduced. The implications a road pricing scheme would have on the UK would be large as people will change their driving behaviours.

    A report by the RAC foundation released results that ‘58% of drivers agreed that a per-mile, pay as you go system would make them think about how much they drive’ It could mean that less busy roads become more congested because they are cheaper to use which only changes the pattern of congestion and not the level. The UK does have a ‘driving culture’ and the number of British staying in the UK for their holidays rose by 7% in 2009, a possible indirect effect of a consistently weak pound and the recession.

    The road pricing scheme could change this effecting local businesses in seaside resort and holiday camp areas. The scheme could hit transport and haulage firms hard if that is the major cost of their business so the gain in GDP from reduced congestion is redundant if there are losses of GDP. The increase costs to firms could cause an increase in unemployment. The government would need to price different areas carefully and only have the highest price per mile in areas which have extreme congestion.

    Roads which are not used often may be used dramatically more as people alter their routes to pay less. This would spread negative external effects such as noise pollution to a larger area especially on the outskirts of towns and cities. The high range in the price per mile (?0. 02 to ?1. 34) is a disadvantage to people living in city centres who have barriers to moving due to geographical immobility which includes difference in house prices, social ties and costs of moving house.

    The way the road pricing scheme would work at the moment has some major flaws such as the inability to differentiate how fuel efficient a car is. If petrol duty was scrapped in favour of the road pricing scheme the incentive to buy fuel efficient cars would disappear which is bad for the environment. A large amount of tax revenue would be raised which they could use to improve transport infrastructure such as roads, buses and trains. However the administration costs and sunk costs of implementing such a technologically advanced scheme would be costly.

    In conclusion, the road pricing scheme would have many benefits for the UK as by introducing a market system for roads. Studying people’s elasticity’s would allow the government to engineer the prices to reach optimal flow targets and the reductions in congestion could make the UK more efficient as an economy. The tragedy of the commons problem would be solved as the full social cost would be paid by the tax as agents would be paying for the negative externality they are inflicting. A secondary benefit would be a reduction in pollution which is a social and environmental gain.

    The scheme could increase incentives to use public transport or car share. Research from schemes in the UK and abroad shows that congestion pricing does decrease congestion despite a negative reaction by the public. There are however, flaws in the scheme such as an increase in inequality illustrated by the Lorenz curve and the gini coefficient figures. The effect on local businesses and holiday resorts could affect unemployment therefore the government needs to think very carefully about the effects in each individual place from road pricing.

    Overall the road pricing scheme has potential to work however there are many ways that it can be improved to be more popular and to provide the right kind of incentives. Lower prices could be charged to businesses depending on transport such as haulage firms and taxi firms. Alistair Darling commented that differentiating vehicles which are more fuel efficient would be too complex so research into this could be taken out so research could be done in this area and areas such as tracking number of people in a car.

    The road pricing scheme is a step in the right direction towards introducing a market for roads and if it is possible to improve the scheme in ways mentioned and make sure the public are fully informed on how the scheme works, it could revolutionise people’s behaviour on the roads and decrease congestion. General References Button, K J (1993). Transport Economics. 2nd ed. London: Edward Elgar Publishing Limited. Estrin, S Laidler, D Dietrich, M (2008). Microeconomics. Edinburgh: Pearsons Education Limited Mallard,G Glaister, S (2008), Transport Economics. New York: Palgrace Macmillan.

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