Discuss the advantages and disadvantages of Electronic Road Pricing in the United Kingdom. [25]

Discuss the advantages and disadvantages of Electronic Road Pricing in the United Kingdom. [25]

Tutor's Note: My site will start having more and more Economics materials and interesting Economics topics from around the world, rather than just purely having material from Singapore or from pure Economic theory only. See here, as an illustration, for an example of an Economics essay on China's economy on JC Economics Essays. 

Introduction

This paper discusses the economic advantages and disadvantages of Electronic Road Pricing (ERP) in the United Kingdom (the UK). First, a few definitions are in order: what is ERP? ERP is the idea of congestion charges, where a charge is imposed on cars that drive within a restricted zone during certain times of the day. This paper discusses the economic advantages and disadvantages of ERP in the United Kingdom’s context.

Advantages of Electronic Road Pricing in the UK

First, ERP raises revenue for the UK government effectively, because the demand for road trips is relatively inelastic, especially during peak hours during the day. According to economic theory, relatively inelastic demand suggests that when prices are raised, revenue will increase, ceteris paribus. If the UK government gets more tax revenue, other taxes can be decreased, the government can spend more on public transport, or the budget deficit in the UK can be reduced. Hence, this method of raising revenue can be considered a major advantage.

Second, ERP can increase social efficiency. In a free market, the consumption of car trips is heavily over-consumed. This is because when people are driving, they ignore the negative externalities of congestion and pollution, and only consider their own marginal private costs and benefits. Externalities are third party spill-over effects, and can be negative or positive. In the case of cars, they produce many negative externalities to other people who are not involved in the use of private cars. The marginal social cost of driving is thus much greater than the marginal private cost of driving. 

In fact, empirically, congestion costs the UK economy billions every single year in lost output and wasted time. Pollution from cars is also a significant contributor to carbon dioxide emissions in the UK. Road charging should encourage people to look for other forms of transport which do not pollute as much. Therefore it makes sense for the government to charge a much higher price of driving in congested areas because this will make drivers internalise the externality.

Disadvantages of Electronic Road Pricing in the UK

On the other hand, there are of course certain disadvantages of ERP in the UK. First, it seems to be an intrusion on liberty. To drive one will need countless documents or be monitored by technology. The driver’s movements on the roads and whereabouts might be tracked, which could affect his freedom.

However, this point does not seem rather strong because most times when consumers use electricity or Internet access, their movements and usage are tracked as well, and hence this cannot be considered an infringement of liberty.

Secondly, the government seems to be just using ERP to raise money, which may not be politically acceptable. There could be the perception that this idea does not tackle negative externalities, but is instead a new method of raising revenue from the people.

However, that is indeed one of the reasons for the existence of income tax, Value Added Tax, and every other type of tax. Raising money from a new tax enables other taxes to be lowered or spending to be increased, and therefore this need not necessarily be negative.

Thirdly, ERP increases inequality in the UK. This is true to an extent. This is because a road pricing charge is a higher percentage of a tax for those with low incomes, relative to those with higher incomes, and as such impacts the poor more than the rich who can easily afford to drive, even with congestion charges.

However, buying a car and paying for petrol also affects inequality in the UK. If concern about the equality of income distribution is an issue, the government can alter other taxes and benefits, by taxing differently and redistributing the proceeds. A tax which increases efficiency – in this case solving the market failure of negative externalities – need not be stopped on equity grounds. It is always possible to compensate the effects to others by different redistributions of income, which is outside this paper’s arguments.

Conclusions

In conclusion, ERP clearly has both advantages and disadvantages for the UK government. First, ERP raises revenue for the UK government effectively, because the demand for road trips is relatively inelastic, especially during peak hours during the day. Second, ERP can increase social efficiency and force drivers to internalise their externalities, thus solving a market failure. On the other hand, there are of course certain disadvantages of ERP in the UK. First, it seems to be an intrusion on liberty. Secondly, there could be the perception that this idea does not tackle negative externalities, but is instead a new method of raising revenue from the people. Thirdly, ERP increases inequality in the UK by impacting the poor more than the rich.

In the final analysis, however, given that the core economic issue here seems to be the market failure of negative externalities affecting the socially efficient level of output, then ERP is indeed a good method of solving a particular market failure in the UK, and all other considerations seem to be secondary rather than primary to the core issue. 

JC Economics Essays: Tutor's Commentary - As promised, this site offers more than just topics of interest to Singapore, but also other countries and international events, situations, and much more material. Hopefully this will help you in your Economics revision, and at any rate you can get to learn more about other countries and their economies, or their economic situation, and see how general Economics concepts can be applied to different countries' contexts, and the international context as well. Observe that from a student's viewpoint (as well as an Economics tutor's viewpoint), solving congestion utilises general economic principles that apply not just to Singapore, but to other countries' contexts as well. In other words, always think of how you can APPLY Economics to DIFFERENT contexts, topics, and subjects. As usual, the usual tutor's comments apply: think of what the relevant diagrams should be; how would you improve on this answer, and how can you approach this Economics question other than using this approach? Thanks for reading, and cheers! (Acknowledgement: This Economics essay was written by a student who worked with me.) 

(b) Evaluate the possible policies a government might adopt to deal with the above market failure.

The first part of the question: (a) Explain why pollution and congestion caused by cars may cause market failure. [10]

(b) Evaluate the possible policies a government might adopt to deal with the above market failure. [15]

(in this case, externalities, as can be seen in the part (a) answer above) (15)

There are many policies that a government can utilize to overcome externalities in terms of congestion and pollution. This paper suggests policies and highlights their pros and cons. The government can impose congestion charges, such as the Electronic Road Pricing in Singapore (ERP), impose quotas or taxes to control the vehicle population, such as Certificates of Entitlement in Singapore (COE), improve the public transport system, build more roads, and other miscellaneous policies. All these will be explained and then evaluated in this paper.

First, would congestion charges work? They might work as the government is forcing drivers to internalize the externality. In this case, drivers will internalize the negative externality. What does this mean? Internalizing externalities means that the drivers are forced, by the use of the congestion charge, to factor this additional cost into their calculations, hence reducing the number of trips they take and raising the private cost of driving to the drivers. This suggests that congestion charges are an excellent government policy that would have a high chance of working precisely because they makes drivers consider social costs as private costs.

Insert economics diagram. What diagram goes here?

The diagram above demonstrates the core idea of congestion charges, which is to shift q1 to q2 and p1 to p2, which shifts the private cost curve to the social cost curve.

Yet, the problem is that the government may further distort the market instead of getting a desired outcome because of imperfect information. The government may want to know but it cannot. There is no way for the government to know exactly what and where the socially optimum level of driving is because in reality, such data is impossible to find. How much congestion charge should the government charge?

In addition, the government might find it hard to adjust congestion charges because of political reasons. Should the congestion charge be high, possibly solving congestion and pollution, but endangering political success at elections; or should the congestion charge be low, possibly not solving congestion and pollution, but being more acceptable? It seems that theoretically congestion charges tackle the core issue of the overconsumption of car journeys by making drivers internalize the externality, but in practice there are many unaddressed and difficult issues.

Controlling the population of vehicles is another possible solution, where governments target the supply of cars and not the demand for cars. The Singapore government, for instance, uses COEs to control the supply of cars, as whoever wants to drive needs this licence to own a car. The total number of cars can be thus controlled with this kind of quota, which limits the total number to a cap. In comparison with congestion charges, COE does not restrict the use of the car, but reduces car ownership, with the central idea being that there would be less congestion and less pollution with fewer cars around.

Yet controlling the population reduces the total amount of pollution, yet may not reduce congestion. The reason is that congestion depends primarily on usage, which can be thought of as how many cars are out on the road at any given time. During peak hours there would automatically be congestion, even if governments were to reduce the total number of cars. This is because the cars are on the road at the same time. Hence, controlling the vehicle population is a good idea but should be done in conjunction with reducing usage as well.

Improving the public transportation system is yet another solution. This would provide an alternative to using cars as a means of transport, or as we say in economics terms, a substitute. By subsidizing public buses and trains, and making them more affordable and convenient, the use of cars would be lessened, and congestion and pollution would be reduced. For instance, people who would drive will decide to take the bus, and there would be fewer cars on the road.

However, with the exception of trains, buses produce pollution as well, and while reducing congestion would not necessarily reduce pollution if more buses are put on the roads. Also, the cost of improving public transport might be prohibitive, where governments face the opportunity cost of the money forgone for other more pressing uses, and there might also be strong opposition from people who prefer their own cars. All considered, however, improving public transport would still prove to be a good method of reducing congestion and pollution.

Another solution by governments is usually to build more roads, as by building roads, there would be less congestion. However, the issue is that road building does not solve the underlying problem, which is the externality. There would still be many cars on the road, and the decisions made by private individuals would still conflict with the social good. Unlike the other methods discussed earlier, road building does not reduce the usage of cars, and does not reduce car ownership. Hence building roads helps win elections more than it does actually solve congestion or pollution, which are market failures by nature.

Moral suasion and other non economic methods could also be used, but they are short term and still do not address the underlying negative externality. For example, posters and public education are not that effective in reducing overall car usage in Singapore. Therefore, they are also not heavily used in most other countries as well as compared to the methods of reducing car usage and ownership.

In conclusion, a government has many ways of dealing with congestion and pollution, but each policy chosen has pros and cons which must be carefully evaluated. Controlling car usage by the use of congestion charges like ERP make consumers internalize the negative externality because they consider their private costs and not social costs, yet there are political repercussions and informational challenges. Reducing the total number of cars will bring about less congestion and pollution overall but does not solve the problem that car usage is concentrated at certain times. Improving transportation systems would be a good idea if the cost were not too oppressive, as there would be an opportunity cost in terms of other more pressing governmental projects. Building roads and moral suasion might not be sustainable. Therefore, all considered, a mixture of various policies should be used rather than a one size fits all policy that pretends to be a panacea but is not.

JC ECONOMICS ESSAYS Tutor's Comments: This Economics essay is very well written and addresses the question fully. How and why? Think about it. How would you improve this essay, or how could you approach this question slightly differently or alternatively? This Economics paper was also professionally written, jointly with part (a).

(a) Explain why pollution and congestion caused by cars may cause market failure [10]

(a) Explain why pollution and congestion caused by cars may cause market failure. [10]

Pollution and congestion may cause market failure because they are forms of negative externalities, which distort the socially optimal workings of the free market. Externalities are third party spillover effects, and can be categorized as positive and negative. Whether positive or negative, externalities cause market failure as they distort the socially optimum output to society because of a discrepancy between the social costs and benefits and private costs and benefits. Market failure can be defined as the failure of free markets to allocate resources in a socially efficient manner. This paper discusses why negative externalities cause market failure in the context of congestion and pollution, and demonstrates there is a deadweight loss to society when drivers consider only private costs and benefits and not social costs and benefits.

A negative externality occurs when motorists fail to consider the social costs of their journeys. The individual motorist only considers his private costs and benefits, and hence only his private marginal cost matters to him. For instance, fuel costs are part of his private costs and he factors them into his calculations. However, by driving on the roads, a motorist inflicts external costs on others, namely congestion and pollution. Congestion is a third party external cost because other drivers have their speeds reduced as a result and pollution is a third party external cost because pedestrians and motorcyclists suffer from irritation and perhaps even health problems. Hence, the motorist who considers only his private costs and benefits fails to take into account the external costs that he imposes on others.

These results can be seen in the following diagram…

Insert diagram

The diagram demonstrates that the socially optimum level of car journeys should be at q2 at a price of p2, yet the private market, which does not take externalities into account, produces q1 car trips at a cheaper price of p1. This means that the negative externality results in more car trips being taken at a lower price than what is socially efficient. Since the number of car journeys is underpriced and overprovided there results a deadweight loss to society. The socially optimum level should be at p2 and q2, not p1 and q1.

Therefore, pollution and congestion caused by cars are likely to cause market failure.

In conclusion, there are many types of market failure: imperfect markets, the failure of Adam Smith’s free market to produce public goods, and above all externalities. In the case of cars, causing congestion and pollution, the market failure in question is externalities – and in particular, negative externalities, where third parties suffer negative spillover effects such as congestion and pollution when others drive.

JC ECONOMICS ESSAYS Economics Tutor's Comments: This is a very well-written Economics answer. What can you learn from the way this economics essay is written? Why is it good? How would you have addressed the question? And what other comments would you have about it? Do think about how to write a proper economics essay every time you read one. This economics essay was professionally written.