Introduction to Economic Analysis Essay

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 consumed hence the sensitivity of car ownership will be large. Price elasticities will rise and fall with increase and decrease in prices respectively. Price elasticities will also have a specific relationship with travel time elasticities (Odeck and Brathan, 2008.p.75) Basically, higher elasticities will be recorded where the roads under consideration are characterized by lower congestion levels, fewer essential trips, and variety of options. Demand will vary depending level of tourist activity, level of economic activity, fuel costs and travel conditions on parallel roads (Evans, Bhatt and Turnbull 2003). The values for transit elasticities will vary depending on the portion of the demand curve under consideration. Ordinarily, dependent riders encounter lower elasticities while the discretionary riders encounter higher transit elasticities. In the following section, this paper uses the demand and supply diagrams to analyze the impact of road pricing on the market for petrol and the market for bus journeys. Price of road travel  HYPERLINK "http://en.wikipedia.org/wiki/File:Supply-demand-right-shift-supply.svg" 
 Fig: 1. Source: /Market_failures/Road_congestion.html In the supply and demand diagram above, when supply shifts from S1 to S2, the price drops from P1 to P2 while the quantity consumed increases to Q2 from Q1. When road pricing is applied, motorists are likely to respond by changing commuter trips and departure times. Some people will tend to avoid private travel and shift to public transit which is presumed relatively cheaper. Where road pricing leads to improved traffic flow by managing congestion, more vehicle travel will be encouraged hence raise the demand. More vehicle travel will mean higher fuel demand which may then cause the price of fuel to go up. In the fuel market therefore, an increase in fuel price will in the short run lead to a decline in fuel consumption as motorists adjust their traffic speeds, cut down on total vehicle mileage, as...