How Effective is a Congestion Charge?

A local authority wishes to reduce the use of cars in its area and is considering imposing a congestion charge as a mean of deterring the use of cars, ie every time that a car enters the area it will incur a charge .

Using the concepts of elasticities of demand , examine what you think will be the effect on how people will travel in this area if such a charge is imposed.

Driving already incurs taxes, most notably, petrol tax. However, petrol tax doesn’t discriminate for where congestion is worst. Therefore, councils could place a congestion charge on driving into a certain area. This extra cost would shift the supply curve to the left. The higher price would lead to a reduction in demand for driving in that area.

Diagram of Congestion Tax 

If the tax is quite significant, such as £7 per journey, you would expect it to have the effect of reducing demand. However, it is uncertain how much demand will fall by. If demand for driving in this area is inelastic, the higher price will only have a relatively small effect on reducing demand. However, if demand is elastic then there will be a bigger % reduction in demand.

There are various factors which will determine the elasticity of demand.

1. Are there alternative modes of transport? e.g. in London, commuters can use the underground, but, in Birmingham there is no underground system. Therefore a congestion charge may be less effective in Birmingham
2. How necessary is it for people to drive in that area? For example, is there good parking on the outskirt of the area? If the main shopping centre is in the zone, people may still need to drive there.
3. Over Time. Overtime the congestion charge may become more effective. i.e. people have time to buy a bike. In the longer term, shops and businesses may relocate outside the congestion charge.

See also:

• Advantages of Electronic Pricing
  
• Congestion and market failure