Mr. Andrew Donald lives in the Ringwood which is located in the northeast side of the city
Question:
Mr. Andrew Donald lives in the Ringwood which is located in the northeast side of the city and has to drive to his workplace in Altona which is located in the Southwestern side of the city. There is a highway that connects these two regions, which is the fastest route between these two regions.
Other substitute roads may have longer trip times as they pass through the central business district. There is usually heavy traffic and congestion on the highway and Mr Donald has to spend an extra 40 minutes in congestion every day, 40 precious minutes that he could spend with his family rather than waiting in traffic. He usually has to leave home early to get to work on time. But sometimes like today an accident makes the congestion worse. He may miss an important meeting at 9:00 am.
Recently, the government has announced that it is considering building a new highway to transfer some of the congestion to the second road. However, this plan has been opposed by environmental groups. They believe that building a new road would affect the wildlife of the city, makes more noise and air pollution and would not solve the congestion problem in long term. Some opponents advocate the use of congestion charge. Under this system, drivers who use the highway during peak hours have to pay a price. Their argument is that by applying road pricing, some of the drivers would be encouraged to use the other roads, or even public transport. This will decrease the congestion on the highway.
1:
Briefly described the three types of road pricing: (a) Pigovian tax for externalities, (b) pricing of public roads or user pay principles, and (c) road toll for private financing.
The concept of road pricing is introduced by Arthur. C. Pigou in 1920. However, it took a long time until it was applied in a city. Do a literature review on Pigouvian tax and congestion pricing.
Summarise the application of congestion pricing around the world (how, when, what, why, etc), its pros and cons (technical, economics and social), and the outcomes (congestion reduction, welfare impacts, etc). Write your findings.
Some useful references on how to do a literature review: https://www.citewrite.qut.edu.au/write/litreview.jsp https://emedia.rmit.edu.au/learninglab/content/literature-review-overview
2:
In this part of the task you are required to discuss the economic theory of congestion pricing (Pigouvian tax), and how prices should be set, whether different prices should be set for different groups and how to determine the different congestion prices. Provide numerical examples to illustrates and explain your examples (no exact calculation needed – just why one number is bigger than another. You can make up your own examples, use the ones given in the lecture or use numbers you found in your literature review).
In this part of the task, you are required to go through one of the many factors that influence congestion pricing – demand and willingness to pay. What price Mr. Donald is willing to pay to reduce the time he spends in congestion? Assume he is paid $60 per hour. Compare his willingness to pay with a person with $15 per hour salary rates. State the assumption you made in your calculation. How will a flat tax affect them and their consumer surplus?
3:
Two options to reduce congestion have been suggested in the case study: congestion pricing and building new highway. Another option is fuel tax. Compare the impacts of these three options on congestion reduction, relative cost of collecting the revenue and equity in income distribution or tax burden.
How is fuel tax implemented in Australia (or your home country)? Is it effective in reducing congestion in Australia (or your home country)? What is the main economic purpose of the fuel tax? What recommendations would you give to the government to improve or change the fuel tax system to make it more effective in reducing congestion?