Economics of Congestion


Economic Cost of Cars

1. Congestion

  1. Time lost which has a monetary value
  2. Frustration
  3. Increase in pollution
  4. Increased cost of petrol

2. Pollution

Unleaded petrol has helped reduce lead, but there is still a problem of carbon dioxide and nitrogen dioxide exacerbating global warming
Also an increase in respiratory problems such as asthma

3. Accidents

4. Noise

Bet. ’83 and ’96 road traffic grew by 55% amount of roads by 6%

Existing system of allocating road space

1. Demand for cars

2. Price –petrol, cars, tax, maintenance

3. Income

4. Price of substitutes

5. Price of complements


Socially Efficient Level of Road Use

where Marginal Social Benefits equal Marginal Social Costs


  • Social Efficiency is at Q2


Solutions To Road Congestion

1. Increase Supply of Roads (CBA)

BUT problems of doing this:

  • Increases demand further
  • Not always possible in city centres
  • Destroys landscapes

2. Government Provision of Public Transport


3 Regulations and Restriction

  • a. Bus and cycle lanes
  • b. One way streets
  • c. Pedestrian areas
    • However, these tend to divert congestion rather than solve it
  • d. Parking restrictions
  • e. Park and ride schemes

3. Changing market signals

a. Extending existing taxes:

  • b. Variable tolls
  • c. Supplementary licenses for congested areas
  • d. Electronic Road Pricing

4. Electronic Road Pricing

Problems of Electronic Road pricing

  1. Estimates of external costs difficult to estimate
  2. Maybe complicated
  3. Cost of installing and operating it may be high
  4. Evasion
  5. If demand is inelastic charges may have to be high
  6. Threat to liberty
  7. Inequality

See also

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