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Introduction to Economic Analysis Essay (Essay Sample)

Introduction to Economic Analysis Essay Essay / Exercise Topics Essay Topic : Road Pricing " Charging motorist for each mile they travel is inevitable if traffic gridlock is to be avoided, the RAC Foundation charity has suggested (fifth of July 2010). In addition, a study published by the Department of Transport recommends that motorists pay for each journey with the price set according to time, distance and location. " a) Explain why traffic congestion is a classic example of the problem of externalities. (10 marks) b) Consider the ways in which private motorists will respond to road charges and comment on the private motorists' price elasticity of demand for road use. (1Omarks) c) Using supply and demand diagrams analysis and explain the impact of road Pricing on: (i) The market for Petrol. (ii)The market for bus journeys. (30marks) d) Outline the advantages and disadvantages of charging motorists depending on when they travel and which roads they use. (40 marks) source..
Road Pricing An externality describes a ‘spill over effect’ whereby one party makes decision and the costs of the decision are borne by a third party or community (Litman 2001.p.39). Thus positive externalities will benefit the third party or community while the negative externalities will cost the community. Traffic congestion is a classic example of the problem of externalities. In making decision regarding whether to join the busy traffic flow, the road users in most cases will only consider the private costs against the expected gains from a trip. What these road users fail to consider is the additional congestion and related delay that would result from their presence on the already busy channel. Such a decision to join the busy traffic flow will significantly have a spill over effect to the general community including; business operations, the traffic police, emergency services, and hospitals among others (Frank et al 2008.p. 40). Traffic congestion contributes to a wide range of problems: Because of traffic congestion, people waste their otherwise productive time and they arrive late to work and other important functions. While on traffic jam, vehicles waste considerable quantities of petrol and this is an additional cost to the vehicle owners. During traffic congestion, emissions of pollutants from cars are intensified since the number of cars is high. There is also the increased policing cost of traffic flow. Another related problem is to do with cost to community for providing treatment to the people who suffer from respiratory diseases due to traffic related pollution and accident related costs as well. For freight transporters, traffic congestion causes an additional cost as they must adjust their planned deliveries apart from adjusting labour payments and fuel needs. Since many vehicles will be using the roads, the high wear and tear of the roads due to traffic congestion causes an extra maintenance cost to community. An extreme effect of traffic congestion would be the cost burden to employers when workers fail to report to work and quit due to poor progress resulting from traffic congestion related frustrations (Evans, Bhatt and Turnbull 2003). Motorists naturally tend to be accustomed to free roads and parking. Motorists are relatively sensitive to road pricing and will therefore express opposition to road pricing (Gillen 1994.p117). However, if these are not priced, it would violate the consumers’ right requiring that consumers are free to avoid being charged for goods/services they do not need. Road pricing may have quite a substantive impact on travel behaviour. Ordinarily, different pricing will generate different changes in travel patterns hence cause different externalities (positive and negative) to the community (Litman 2001.p.43). For instance, private motorists may shift to un-priced roads and destinations to avoid the roads that are being priced and in doing so, shift traffic problems to those other alternative locations. Similarly, if pricing is pegged on congestion periods such that rates are higher during peak hours, private motorists may decide to change their trips from peak to off-peak hours. Furthermore, if pricing is based on distances, private motorists are likely to respond by reducing the total vehicle trips and trip distances so as to save on the external costs. In the event that better travel options are available, road pricing may result into mode shifts. In a different angle, if the road pricing was meant to raise financial support for expanding road capacity, it may lead to a rebound effect in which there will be an increase in total vehicle travel. Generally therefore, road private motorist’s price elasticity of demand for road use will be high following road charges. Put differently, it means that the road pricing leads to a fall in the volume of traffic and volume of fuel co...
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