The Effect Of The Congestion Charge On Businesses In Central London

3981 words - 16 pages

Despite the size of London, much of the main tourist attraction is focused on a relatively small region on the north bank of the Thames. Within a short distance of each other are: Westminster Abbey, the London Eye, Buckingham Palace, West End, Trafalgar square and Covent Garden. As well as these tourist attractions are the financial and business sectors based in the City. This therefore makes Central London a very congested area and difficult to travel in. It has been estimated that London loses between £2-4 million every week in terms of lost time caused by congestion and because of this something radical needed to be done. To solve the problem of congestion in Central London, the ...view middle of the document...

Figure 1: area of congestion chargeCongestion charge is a classic example of the overuse of a common resource, in this case, the London road network to which there are no boundaries of use. Unless traffic flow is light, each additional road user slows down other drivers but does not perceive this as a cost since it is not included in his or her journey costs. This tends to overuse compared with the situation in which motorists do face this cost. This traffic congestion represents an example of market failure. Market failure means that the market system does not allocate resources efficiently5, in such a way to maximise benefits to society. This comes about when there is a lack of allocative or productive efficiency. Productive efficiency means that the use of resources are being minimised in production, while allocative efficiency means that the best combination of goods and services are being produced, which is given by producing in each market up to the point where price equals marginal costs. This means that there is the greatest difference between benefits to the consumer, as measured by their willingness to pay, and the costs of supplying them, as measured by the costs of production. The calculation of marginal costs and price is the formula for the maximisation of economic welfare as so measured. This is shown by the shaded area in the diagram below.Figure 2: allocative efiiciency6Traffic congestion creates negative externalities, which are costs imposed on others, rather than those persons that caused them; if one drives their car to work, slow down the traffic, and are late for work, then this is a cost that the person or the employer bears. This cost is not taken into account by the person who causes it and so the amount of road use that person has is more than if he or she had to bear the full social cost.Figure 37Qm in the diagram above is the amount of road use the car driver chooses on the basis of private costs and benefits alone. The road user will use the road as long as the benefits at the margin exceed the costs. The marginal benefits are evaluated by the amount the driver is prepared to pay at any quantity, so are given by their demand curve "msb". This is downward sloping, i.e. the driver has a diminishing marginal utility for road use. The cost to the driver is given by "mpc", which is the cost of an additional trip; fuel, wear and tear and delay. This is upward sloping on the assumption that the driver faces additional costs the more the driver uses his car: get more delays and wear and tear will rise. But the allocatively efficient level of use is Qs. From Qs to Qm is the costs of the additional trips exceeding the benefits the driver is prepared to pay for, so that social welfare is being reduced; those resources the driver is using up (other peoples' time and lost output) have use elsewhere in the economy and could be creating utilities (benefits for some one else), so in this case the market is acting on inaccurate...

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