Allowing vehicles to use roads free of charge in towns and cities means that motorists do not have to pay when they enter or leave towns of cities. An example of charging is road pricing.
The first major problem that will be caused from allowing people to use their vehicles free of charge is people will more than likely only consider his or her marginal cost (change in total cost when extra distance is travelled) of the journey they are making. Having no charge is likely to mean that people will find it cheaper to travel a short distance by car than to use public transport. Because of this and the fact that cars are usually more convenient and more comfortable, more people are going to use their cars in cities and towns. This means that that marginal social costs are going to be greater then marginal private costs, meaning negative externalities are gong to exists.
The negative externalities that may be caused if it is free to use towns and cities free of charge are as follows. Probably the most significant is pollution. Heavy traffic flow in the towns and cities is going to cause heavy emissions such as carbon monoxide to be given off. This may lead to more people being diagnosed with asthma or more people having to use doctors and hospitals because of breathing difficulties due to the pollution from the cars. This puts and extra strain on the health services in the towns and cities and means that they will probably require more money from the government to help these people. If this is happening in several towns and cities, the government may have to increase taxes so they can pay for the extra health services required due to the pollution. This would be hugely unpopular with the people. The government may not have to raise taxes by a large amount; they may enforce tax cut incentives if people use low emission cars and marginally raise car taxes on cars that give off a lot of emissions. This may be more popular but it also may place an extra burden on poorer people who can’t afford to buy newer ‘cleaner’ cars.
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A second externality that will lead to economic problems are if there are more cars on the road in towns and cities due to it being free to use the roads, then it can be argued it is more likely for people that there will be more road accidents. If this is the case then it is more than likely that insurance premiums will have to go up because of the compensation the insurance companies are paying out. If the insurance premiums go up by a substantial amount then I could have the affect of increasing cost for businesses. This could be a real extra burden for small businesses and for poorer people who have to use their cars to get to and from work.
A third problem that may be caused if roads in towns and cities are free to use is that of a gridlock at peak times. This causes the negative externalities of people having longer journey times, which may affect businesses and people getting to work. This can add to the problems of pollution because people may be stuck in the traffic jams for a long period with their engines switched on. Businesses such as courier firms may be really affected because they have do their deliveries in the quickest time possible, and so if they are constantly being slowed up my excess traffic their customers may look for different methods to transport their products. However it is unlikely to affect businesses too much because gridlocks and real heavy traffic only really occurs during peak times, but it is still likely to have an effect on pollution.
Governments would want to reduce the use of cars in urban areas to the extent at which marginal social costs equal marginal social benefits. If left to the market as showed below in the diagram, people would use their cars to the point where marginal social benefits equal marginal private costs. To make MSC equal MSB the road users would have to bear the cost of internalising the externalities. On the diagram this is shown by the line in red.
The first policy that a government could adopt is that of road pricing. This means that vehicle owners would have to pay to use the roads in urban areas. This could be in the form of motorists purchasing a licence which could be displayed in there windows and then policed by traffic wardens. The other way and possibly more effective solution is an electronic system. This could be in the form where cars are fitted with electronic devices which would be activated by beacons that are places as you enter the towns or cities. You could be sent a bill monthly. The first problem road pricing is setting a price that would actually reduce the use of cars in urban areas. The price elasticity of car journeys is hugely inelastic. This has been proved in terms of taxes.
Motorists are very heavily taxed mainly through petrol. For every pound spent on fuel for cars, around 80p of it is tax. This is a huge amount and shows that people are willing to pay high prices in order to use their cars. So for road pricing to be affective and reduce Q to Qx the road price would have to be relatively high. However having a very high road price could affect the people who really need to use their cars in urban places the worst. If road users are using their cars for work, they are more than likely to pass the cost of the road price on to their employers. This will increase the costs to firms and if they have a lot of employees which they have to pay for it could cause them to have to raise their prices, this makes not only the businesses worse off but the general public. However to the extent that firms have to increase their prices by, depends on how big the firms are and how many workers they who they have to pay their road costs for. More than likely it would be the smaller firms who see themselves having to put their prices up.
Road pricing would provide a substantial amount of revenue for the governments, how ever would probably we a large initial outlay install the technology and it may also be expensive to maintain. However once up and running the revenues gained from the road pricing could be used to improve the public transport in the urban areas. Road pricing does come with further problems, to stop large traffic movements in off peak times a tear system of payment would have to be used whereby you pay the most at peak time, then either side of peak time you pay a slightly lower figure and so on. This would only be effective if the system was completely electronic. There is also the argument of equity. The government would have to try and decide whether to charge people who live in the areas and if they do, it could cause huge resentment towards the government.
A second policy which the government may adopt is that of taxing car parking spaces in the urban areas. This was proposed in 1998 by the government. Taxing car parking spaces would involve all spaces in the cities and towns and also spaces provided by firms for employees and customers being taxed. The goal of this is to discourage people and employees bringing their cars into urban areas. Again the problem of taxing the spaces is that the prices would have to be extremely high in order to discourage, because the price elasticity of demand of peoples journeys in cars is so inelastic.
The high taxes on the car parking spaces would further add to the cost of businesses, especially those who have to have car parks. The high taxes could cause firms to have to raise their prices or if they couldn’t do that, they may have to lay workers off. Also if firms are bearing the costs of the taxes it is unlikely that workers would car and so still use their cars. It would then be down to the firms to enforce workers not bringing their cars to work. Taxing car parking spaces could encourage firms to move out of the urban areas and out increased pressure on the controversial development of the countryside.
For both policies the government would almost certainly have to improve public transport, this would have to be done before the new policies could be used. This means that a huge amount of money would have to be used to pay for the improvements without having any additional revenues coming in. The successfulness of these policies in both cases depends on getting either the road price and taxes at a high enough level to discourage people and firms using their cars. Too low will mean that it will basically have no affect on traffic in urban areas and so the cost of setting it all up would have been a waste of money but also set too high it could have a huge consequence for firms and especially on small businesses.
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