Road Pricing is Inefficient but Fair Essay Example | Topics and Well Written Essays - 1750 words

Road Pricing is Inefficient but Fair - Essay Example Introducing marginal cost pricing in the London transport sector does not guarantee an efficient outcome when there are externalities or distortions in other (related) sectors in the economy, which are not priced according to marginal cost. Marginal cost pricing has proved difficult to implement in the UK. Such form of pricing would require highly differentiated pricing systems in time and space, which would be expensive to provide and confusing to drivers [7]. From these factors, it is clear that first-best pricing is not very relevant from a practical perspective.A second-best charge can be defined as the optimal road charge when the true optimum (first best charge) is unavailable due to constraints on policy choice. The theory of second best says that a policy that would be optimal without such constraints may not be second-best optimal if other policies are constrained. Unfortunately, this also poses problems. In order to compute a second-best road charge, a fair amount of inform ation is still required, including marginal congestion costs and the exact tax constraints [5].The problem of traffic congestion in London still remains and a solution is required. There is an externality that creates an imperfection in an already imperfect market. A similar problem arises with environmental pollution. We will look at the London Congestion Charging Scheme and its proposed extension as its test-example. We find that the welfare gains from a congestion charge depend crucially on the location. of where the charge applies and charge level and our results are only valid for the set of boundaries that have been proposed by Transport for London (TfL). If the model we use covered a different area, traffic flows and times savings would be different. The political economy of such decisions is not always guided by any efficiency principles, but rather by political forces and lobbies. The final result will be the combination of different pressure and political groups and this m ay or may